Alpha India ME – The Rieki hedge

The main purpose of having a portfolio is diversification, which reduces risk. Investing with Rieki is about matching outperformers against underperformers. This is like investing in pairs. However, instead of developing individual pairs, matching an asset with another say Suzlon (potential outperformer) vs. Bajaj Auto (potential underperformer), Rieki portfolio lets you adopt a combination strategy. This new approach invests in two groups of assets and not just in individual assets alone. One is a group of outperformers and the other group contains underperformers.

How does this help? First it lets us pick up the best value from a universe of stocks. Second, it reduces risk by giving us the opportunity to short potential underperformers, hence reducing portfolio risk by creating a strategy hedge. Third, it increases our holding period for the overall portfolio. We can hold and accumulate the long spot for a longer period of time and similarly we can hold futures beyond intraday volatilities. The Reiki portfolio accumulation approach of value picks keeps us prepared to capture the next stage of the bull market that should start in 2011.

Fourth, this approach also allows us to play according to the underlying bias of the market. If the intermediate multi week market view is negative. We could churn our short futures portfolio actively. We could have more short components against few value spot picks (though the value hedge between long and short is maintained). The market bias can be judged by a trending system, by the ongoing VIX structure, by the view on INR and by a host of factors. The LOSO trending systems that we use is negatively inclined now. In case the bias is positive. Instead of short futures, one could look at using option strategies for the short side of the portfolio (for the potential underperformers).

We have assumed a leverage of 4 times for the short portfolio. This means an average leverage of 2 times for the overall portfolio. We have illustrated the Rieki portfolio with the best and worst components of the pair grid mentioned in our earlier features. It consists of four long trades (Reliance, Tech Mahindra, Suzlon and Reliance Power) and five shorts (Bajaj Auto, Federal Bank, Bank of Baroda, Cummins and Tata Motors).

As one can see the spot portfolio moved from -1% to -10% in the last 10 trading days closing Thursday at 8% negative. The enclosed Rieki portfolio illustrates the running futures and closed trades. The net portfolio is down 1% outperforming the overall market by 7%. The value of the portfolio is nearly 50,000 Euros (INR 30 lakh).

On the sector side, BSE Consumer Durables and NIFTY VIX remain the two extremities of the sector numeric ranking. BSE Auto, Healthcare, FMCG should underperform in the next weeks, while BSE Realty, BSE Metals, BSE Power and INR Futures are best hold and outperformers. So Rieki will be looking for auto, healthcare and FMCG shorts and best hold (buy) opportunities in Power and Metals.

The intermediate (multi week) view on the overall market remains negative. Any potential subminor correction up should end early next week after which Nifty should head towards our anticipated targets at 5,600-5,400 levels. The Indian Rupee is weakening as anticipated, triggering further negativity on the equity side. We also expect further rise of NIFTY VIX till 26-28 levels.