Market Talk: Sabrient Investor's (H)Edge Portfolio up big on bad market day

by Scott Martindale, Senior Managing Director

Scott Martindale

Today the market sold off a bit, but the Sabrient Investor's (H)Edge long/short absolute return portfolio was up +2.3%, and gained +3.8% vs. its market benchmark. This is the great value of an absolute return strategy that helps you sleep better at night.

For the first several months of the year, the portfolio was outperforming its benchmark whether the market was going up or down. It was the best of all worlds.

But then in early July the lower quality stocks started to lead the market...but those are the ones that rank poorly in Sabrient's Company Outlook Rank, which is the basis for the Investor's (H)Edge stock selections. So, while the long picks have continued to outperform the market handily (up +64% as a separately compounded portfolio), the shorts have severely underperformed since July. However, when the market sells off like it did today, it is those same lower quality stocks that get sold first, leading to tremendous outperformance of the overall portfolio.

Such "bottom-up" rallies as we've seen since early July are going to occur from time to time, and make us wish that we were keeping the long & short portfolios completely separate (and compounded separately). However, days like today remind us of the value of following a strict dollar-neutral approach to putting on new positions.

Of course, one way to prevent the shorts from hurting your portfolio too much is to buy put options, which limit your downside to the cost of the option. You can also enhance returns by writing out of the money options on positions (long or short), or reducing exposure (partial stop losses) on positions that are moving against you, or by harvesting partial profits on positions that move strongly in your favor. These are portfolio management tactics that are outside the mechanical portfolio strategy we are publishing, but you can pursue them as you see fit!