Dark Horse Hedge

Introduction to the Dark Horse Traders' Hedge

The Dark Horse Traders' Hedge is long/short virtual portfolio written by Scott Brown, Managing Director – Retail Division at Sabrient Systems.   It is a  based on  Sabrient System’s highly successful and popular Investors’ (H)Edge Portfolio.

The Dark Horse Traders' Hedge takes advantage of technical market trends to tilt the balance of LONG vs. SHORT in bearish, bullish or range bound markets for added alpha (the measure of return on a risk adjusted basis). Long and short equity positions taken in the Dark Horse Hedge portfolio will be chosen using to Sabrient’s rating system, which is based primarily on fundamental criteria. Because the stock positions will generally be held for intermediate to long periods, these positions are ideal for using with option strategies taught by Phil Davis, of Phil’s Stock World.

The Dark Horse Traders' Hedge (DHTH) newsletter will follow a number of guidelines in an attempt to minimize systemic risk, or “beta.” Beta is a measure of the volatility of a portfolio in comparison to the market as a whole. To keep beta low, the DHH portfolio will have both long and short positions. Consequently, dramatic moves in the market will always be in the direction of at least part of the portfolio.

Using Sabrient’s rating system, we will focus on being long high quality stocks, and short low quality stocks. Long positions should fare better than average during market selloffs. In contrast, the short positions, selected from the lowest ranking stocks, should perform well during selloffs. These stocks are also expected to underperform higher quality names in a stronger market. This strategy is designed to balance the goal of attaining alpha with the desire to keep beta relatively low.

We will follow this list of guidelines in building the DHTH portfolio.

1. When fully invested, the DHTH portfolio will have 24 positions. However the portfolio may not be fully invested.

2. Tilting (or weighing) of the portfolio will be based on the position of the SPX relative to its 50-day and 200-day moving averages.

• If the SPX is below both its 50-day and 200-day MA, the portfolio will be tilted SHORT with 67% SHORT and 33% LONG (i.e. up to 16 SHORT and 8 LONG positions when fully invested).
• If the SPX is between its 50-day and 200-day MA, the portfolio will be balanced equally LONG and SHORT (i.e. up to 12 LONG and 12 SHORT positions when fully invested).
• If the SPX is above both its 50-day and 200-day MA, the portfolio will be tilted LONG with 67% LONG and 33% SHORT (i.e. up to 16 LONG and 8 SHORT when fully invested).

3. A hysteresis will be used around the tilting to avoid whipsaws.

4. Ten percent (10%) of the portfolio will be maintained in cash for swing trade alerts. Exceptions may be made to devote more than 10% of the portfolio’s value in in swing trades when presented with compelling opportunities.

5. Each position will be monitored daily with alerts for changes on the next trading day open.

6. The portfolio assumes a $100,000 starting account using leverage of the LONG positions to SHORT.

7. Positions are chosen using the Sabrient Outlook Score and Top-ranked and Bottom-ranked stocks.

Disclaimer: Dark Horse Traders' Hedge is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.