Wednesday, October 04, 2006
Well they did a fine job turning them around late in the afternoon as crude closed near its high of the day so the oil stocks get carried and the last to turn were the MLPS with the index closing up .58 at 255.58 and at the high of the day! Look for follow through buying at the open. I will be on the prowl for any after hours developments.
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joseph cioffi's Source Page - Associated Content
4 comments:
I have been playing around with AMZX historical data to see what hedges might be effective in lowering the volatility of a MLP portfolio. I found that interest rates (TLT), Oil (USO), and Oil Services (OIH), and the S&P Energy sub-index did little to reduce volatility. XLE is the only instrument I have found that has a substantial effect on the daily vol of MLP's. The recent (last year) optimal hedge ratio is short 20% XLE for every long unit of AMZX. Over 4 years the best hedge is 29%; the shorter the history the lower the correlation seems to be.
What would be the total return on the hedge position?
The 4yr annual return is lowered from 21.3% to 13.5%. I guess more importantly when I solve for the max Sharpe ratio, I get almost a 100% weight in AMZX and nill in TLT, XLE and crude. Bottom line is historically you really can't beat MLP's sharpe ratio. Hopefully that will be the case for the next 4 years as well.
while past performance is not indicator of future returns...its the only thing we have as chartny likes to point out. Bottom line is for me is that "it works"
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