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September 9, 2014

TrendBands Long/Short Hedge Fund

A Faux Fund with a Real Strategy

Let's have some fun. Over the summer, I have been conceptualizing applications for my TrendBands indicator. One of the primary uses under consideration involves trend guidance on weekly equity charts. This application has been highlighted on occasion in the Member Letter, but the technique needed refinement. For example, I asked myself questions such as how cycles could compliment TrendBand signals. How can one learn to ignore minor infractions of a TrendBand so as to stay with a continuing trend? Are short signals generated the same way as longs? How and when should a trader add to positions?

After much chart gazing, I came up with a cohesive system and decided the time had come for a bit of forward testing. To do so, I set up a faux long/short hedge fund to simulate trading and calculate returns as if within an investment partnership. More than one colleague suggested I operate this forward test publicly in order to simulate the full effect of performing under the gaze of investors. So you, readers, are the faux partners in this faux hedge fund.

The TrendBands Fund began "operations" in August, and when the upgrade of this web site is launched in the next few days, you will have access to your August partner letter, detailing initial positions and August performance (+0.16%). As with any hedge fund, your window into fund activity will come with the monthly letter, but Members will be privy to real-time trade and portfolio updates.

The concept of the fund is to trade three categories of equities: ETFs, large cap equities, and small caps with growth stories. ETFs and high caps will be traded from either the long or short side, while growth companies will be long only. When trading equities, I prefer ETFs and large caps because they are less susceptible to large opening gap moves. Small caps are certainly not immune to adverse gap events, but such risk is outweighed by the potential for tens or hundreds of percent returns when a good story delivers a good trend. The key to controlling risk in this category will fall on initial position sizes (and some good research).

In addition to these three primary categories, the fund will also trade Spyders using a rule set developed specifically for the S&P 500. Trades in SPY will not be subject to initial position size limits and, in fact, may be as much as 100% of equity, depending on signal strength and net exposure.

My indicator is no panacea to bad trades. TrendBands is simply a statistical tool for riding a trend when a trend develops and for protecting capital otherwise. In fact, I anticipate that this methodology will generate many more small losses than big winners. I will post some examples in coming days.


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