HardAssetsInvestor

Written by HardAssetsInvestor.com  |

December 12, 2008

Hedging Bets By Going Long AND Short

Details

HAI asks senior advisor Jerry Miccolis how he's handling client portfolios given the continuing market volatility.

• From long-only to managed-futures plays
• Looking at the commodities trends indicator
• On the radar: Alternative Energy

 

Jerry Miccolis is a senior advisor and co-owner of Brinton Eaton Wealth Advisors, which is based in Madison, N.J. The 20-year-old firm manages portfolios for institutions and high net worth investors. Its dedicated research staff tracks developments in bonds, stocks, mutual funds and exchange-traded funds. In commodities, Brinton Eaton focuses on mutual funds and exchange-traded notes. Before joining Brinton Eaton in 2003, Miccolis served as the global risk management practice leader at Towers Perrin.

 

HartAssetsInvestor.com (HAI): Are you reducing positions in commodities at this point?

Jerry Miccolis, Brinton Eaton Wealth Advisors (Miccolis): We're shifting more than reducing. That means we're going from a long-only play to more of a managed futures play that can go long as well as short. For example, historically we'd been in a long-only ETN, the GSP. We'd also held positions in a mutual fund that tracked the same index - the QRAAX. Through our own research and modeling, we had taken anywhere from a 10-15% position in client portfolios in the S&P GSCI.

HAI: How did you change those positions?

Miccolis: This is a change, literally, as we speak. We made this decision earlier in the week to take about half of those positions and move them into a fund that tracks the commodities trends indicator. It's basically an index published by Standard & Poor's. We have, for over a year now, been investing in the diversified trends indicator published by S&P through a mutual fund, the Rydex Managed Futures Strategy (RYMFX).

A component of that indicator is the commodities trends indicator. We liked that better because it has performed better than the broader indicator over the last several years. That has especially been the case during the more recent turmoil in the market.

Two investment vehicles have come online this summer tracking the CTI. One is the ELEMENTS S&P CTI ETN (NYSEArca: LSC). The other is a mutual fund, the Direxion Commodity Trends Fund (DXCTX). We've taken half of our previous positions in commodities and put those assets into DXCTX.

HAI: What are the major advantages with these funds?

Miccolis: The advantage of the CTI versus a pure long-only commodities index is that it tends to be much less volatile over time and returns are still quite high. LSC follows the very quantitative, rules-based algorithm that S&P now has the license to use. Basically, it allows the fund to go long or short on commodities futures. But it's all based on the formula. The index covers 16 different commodities and can go long or short in all of them. The exception is in short positions for Oil and Gas. If the formula says to short either of those two areas, then the fund will get out of it. But it won't actually take short positions. Both the mutual fund and the ETN are trying to track the index, not beat it.