+0.87%
+1.14%
The year in my hedge fund began with several trades to alter the hedging strategy. In 2011, correlations among individual stocks were at all-time highs. This led me to rely primarily on index exchange traded funds for hedging the long portfolio. Recent persistent strength in U.S. economic data and modest progress toward solving the European sovereign debt crisis leads me to believe that correlations could fall this year making a better balance between individual stock and index hedges a value creating strategy. It is important to note that research driven shorts, independent of portfolio hedging remain part of my strategy.
I began to rebalance hedges this week by adding shorts in Scripps Networks (SNI) and Texas Instruments (TXN). Simultaneous with shorts in these stocks I reduced my short in the S&P 500 (SPY). There are three ways these shorts can add value. First, the stocks could lag their peers that my fund holds long. Second, these shorts can provide poor relative performance versus the S&P 500 that they replaced. Third, the stocks can have outright declines based on weaker than industry average fundamentals.
SNI is held short against long positions in media content companies including CBS, AMC Networks (AMCX), Discovery Communications (DISCK), and Viacom (VIAB). I believe that SNI’s ratings weakness and small stable of networks could cause the stock to lag its peers in 2012. In addition, weak housing data makes SNI’s focus on home-based programming less attractive to advertisers.
TXN is held short against longs in Qualcomm (QCOM) and Broadcom (BRCM). All three companies are major players in communications semiconductors but QCOM and BRCM are share gainers while TXN is barely holding its own. Semiconductor stocks are notoriously volatile. I see a scenario where a bull market for semi stocks sees QCOM and BRCM leading the way and TXN lagging. In a bear market for semi stocks, TXN could hold up better than our longs but is still likely to perform worse than the S&P 500 making it a better hedge.
Disclosure: CBS and DSICK are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. CBS, AMCX, VIAB, DISCK, QCOM, and BRCM are net long positions in the Entermedia Funds. TXN and SNI are net shorts position in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.
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