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US$ hedging stategy: VI (the Google strategy)

As I was reading an interview with Jim Rogers I was reminded of another hedging strategy commonly employed by hedge funds.  The long/short strategy, which requires that an investor place equal long and short positions in different investments.  The result of this is (theoretically) that in a rising market, your long position will, if well selected, outperform your short position on the upside.  And during a falling market, the short position, if well selected, will realize it's full potential and fall further than the long position. 

So in the end, I would need to place a short US equity position of equal size for every long position I own.   (I call it the Google strategy because I can see no other stock that is so obviously overbought and despirately asking for a short)
By sharpsicle at 2006-02-09 23:56 | Stocks | sharpsicle's blog


Are you serious?

Talk about dangerious advice.  Essentially, the strategy is go long on the best company in the industry and short the worst company in the industry. Thus, when the industry rises, the best will go up faster and the worst will go up less dramatically. Conversely, when the industry dives, the worst will go down more than the leader.  So, for the "Google" strategy, how would you apply that... Buy Google and short, what?  Maybe, you can buy Yahoo and short Google.. but, you have to right on the ratio of Google to Yahoo stock.. A lot has to go right to make this work.. If you're not balanced, you can lose a lot on your short position. Yahoo is just an example. It's not a value play for any stretch of the imagination. The magic is the correlation and "balance" between 2 positions. 

By schin at Fri, 2006-02-10 13:04 | login or register to post comments

Yes

It's only a dangerous strategy if you don't know how to use it... and I don't.  So I won't be using it.  Mostly my problem is with the short side where I have less confidence in my ability to select the correct time to short a stock.  However... if I did have confidence, I would probably be shorting Google on it's next spike up.  ;)
By sharpsicle at Tue, 2006-02-14 02:16 | login or register to post comments