Quick update - Nov 19
- Using US portfolio to hedge against SG portfolio was a mistake. Because they are not perfectly correlated, both in their direction and magnitude.
Over the last couple of months, US stocks have been on the run up like crazy and I have lost about USD500+ on VXX which bet against the rise of index. It was opened with the intention of hedging against a general market downturn (which happened around this time last year) but didn't happen - given the trade war fatigue (though no confirmed deal signed), no shocking world news and relatively stable economic condition in the US (relatively low unemployment and low interest rate). So people have been parking their cash in stocks and the stock market has been on a steady climb.
I entered too late a position in Mastercard Inc so only have peanut gains so far (a good buy point was at $270). Lesson learnt is to wait for uncertainty in the market and certainty in price action before trying to "hedge". We can never catch the bottom-most nor the top-most price but worse is the middle - trying to bet in which direction it will go.
- SG market has been lukewarm. Singtel was such a drag - after a spike to $3.35 it decided to nose dive again (https://www.todayonline.com/singapore/singtels-first-ever-quarterly-loss-one-unlikely-have-ongoing-impact-analysts).
Biggest gainers are OCBC, Capitaland Mall Trust and ST Eng.
- Crypto seems to be in the limelight again. Here's what I understand - blockchain is a form of technology, it enables the existence of cryptocurrency. What made me skeptical about doing crypto investment is mainly counter-party risk. The whatever so-called high return platforms for crypto are offering the so-called derivative products and I am not sure how they are being regulated or what they are being backed up by.With the emergence of various cyptocurrencies these days, how are each of their value being determined? [Read: https://www.investopedia.com/tech/what-determines-value-1-bitcoin/]
If we reverse the coin and deem crypto as the "real money" of tomorrow, then what would be the truly secure way to procure and store them without counter-party risks? Until there's a widespread utility for these by-products of the great technology and there are some means to determine each of their worth, I think trading in them is highly speculative and I will steer clear for now. Amidst all that price volatility, I am not sure what's driving their demand and supply. From what I see, crypto's "spot value" is just pegged to the currencies that the particular crypto is being traded in (is USD the standard?), not pegged to gold, assets, nor businesses. Maybe someone with better knowledge could enlighten?
An advantage of cryptocurrency is, like gold, it cannot be easily minted nor manipulated by monetary policies. How it correlates to the various real currencies will require further observations.
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Rainbow girl,
ReplyDelete1. "Because they are not perfectly correlated, both in their direction and magnitude."
I suspect you are missing the point when it comes to hedging or correlation. I'll leave you to figure it out on your own so as not to spoil your learning.
2. Eh... Trading volatility is not meant for Buy-and-Hold:
https://www.benzinga.com/general/education/18/02/11151739/one-of-the-creators-of-the-vxx-explains-the-problem-with-many-volat
The "good news" is -USD$500 is a small price to figure it out by crash got sound.
And yes, I've traded volatility before. Made quite a bit, then lost quite a bit too! LOL!
Now I steer clear of them as I've discovered plain vanilla futures suit me better.
Its good to explore all sorts of different vehicles. If not how to know which ones fit your feet better?
3. One hedge fund manager said it best when he said he believes cryptos are a SCAM. But he has no problem speculating in them just as long he is confident he can find other idiots fools to sell to ;)
Its the same with stocks, properties, or any other speculative assets isn't it?
We have an edge if we know more about the vehicle than the next fool.
Remember, we don't have to outrun the bear, we just have to outrun the idiot standing next to us ;)
Hi SMOL,
ReplyDelete1. Actually I was using VXX as a short term hedge to my SG portfolio as I have emptied out my US portfolio then. Hedging needs to use instrument that are not correlated or are inversely correlated. However this inversely correlated instrument moved too furiously such that my SG portfolio's rise can't keep up with the magnitude of fall.
What's your veteran take on hedging?
2. What do you find attractive in futures? Just curious.
3. All derivatives are speculative.
If nobody wants stocks, the stock market would not exist. If nobody wants crypto, crypto market would not exist. So you are right, we always hope we are not the idiots buying and when we sell, we are selling to idiots. Lol
My point is more of concern to the counter-party risk of crypto trading because there's no so-called CDP, it is not a dealing on an exchange, spread can varies quite a bit depending on where you look... It's like the market marker's field. I have heard about hardware wallets, maybe that is a different story. Like buying gold etf is same same but different from buying physical gold.
Rainbow girl,
Delete1. I've learnt through crash got sound that the volatility ETFs/ETNs are not suitable for hedging purposes (to me).
Its more for retail speculators looking to hit the jackpot while most of the time, most just lose money... (Just look at the 5 years chart of VXX)
That's how I found out the VXX is used by professional traders holding at best for a few hours. Pros don't hold it overnight. (Your short term is the long term for pros)
If we want to hedge using volatility, it maybe better to trade the VIX options directly instead. Its like your Gold ETF and physical gold example ;)
By the way, when it comes to hedging, I don't think there'such a thing as "perfect" correlation or "perfect" inverse correlation...
Hedging does not mean we will not lose money. Its for us to try and mitigate our losses.
2. You may want to read up on futures 101. Futures are created precisely for the purpose of hedging ;)
You hold a portfolio of SG stocks, you hedge it with the Simsci. Simple and clean. Althought not "perfect", its close enough for hedging purpose.
3. If you worry about counter-party risks, then you should not trade OTC (over-the-counter) instruments - like spot forex or CFDs.
Yes, there's a push by the regulators for more trading vehicles to be exchange traded.
I do prefer to trade forex futures for the greater transparency. But its more a personal preference than anything.
Can make money, who cares whether its OTC or exchange traded?
Hi SMOL,
DeleteThank you for your insights.
I read somewhere that futures have a centralized pricing, whereas OTC instruments do not. Futures also typically have lower costs. However, not many bloggers talked bout trading futures. It's even more elusive than crypto.
Did some reading https://www.investopedia.com/ask/answers/031015/how-risky-are-futures.asp
DeleteRainbow girl,
DeleteYoung explore and experiment. How else to know which poisons would suit you best?
Its just like school. Primary and lower secondary we study as many subjects as possible. Then we start to specialise according to what subjects we like as we move up the academic ladder.
Wait.
Bad example.
There are those who choose subjects they think they can make the most money in the future... Not based on their interests or what suits them best.
Just like how most bei kambings approach investing and trading.
Cryptos can make money?
OK, I follow you!
If you can do it, so can I!
Even though I've no clue what I'm doing :)