FAQ

FREQUENTLY ASKED QUESTIONS

What is a dollar neutral portfolio?
A dollar neutral model portfolio assumes an investor is long and short and equal dollar amount.  For example, a $100,000 portfolio would be considered dollar neutral if the long portfolio was set at $50,000 and the short portfolio at $50,000.  Market neutral portfolios do not have any market exposure — the average betas of the long and short positions offset one another.  Our models start each month in a dollar neutral position.  As time goes on, these portfolios may become weighted more or less to the long or short side, depending on the various price targets and stop losses reached.

Why would I want to invest in a dollar neutral portfolio instead of a long-only portfolio?
In theory, by initially being both long and short an equal dollar amount of stocks investors are trading the potential for absolute gains for better risk adjusted gains.

Do the model returns reflect the potential for real returns?
No.  The models in this newsletter have been created for informational purposes only.  The return data we provide do not include any assumptions or estimates for costs or fees.  This newsletter should be considered a tool in helping sophisticated investors make their own trading decisions after thoroughly reviewing our disclosures and disclaimers.  We are providing models to guide your own judgment and help with your decision making; we are not providing a “how-to” manual or tracking real trades.

Where are the stocks for the Naive Model Portfolio?
We decided to omit this model for clarity’s sake.  Subscribers interested in tracking this base model from which our other model portfolios are derived may do so on request.

I am a new subscriber and I want to enhance my own hedge fund strategies.  How do I get started?
Once again, we must emphasize that we only recommend that experienced investors follow and implement our strategies, and only do so after thoroughly reviewing our disclosures and disclaimers.  We are providing models to guide your own judgment and help with your decision making; we are not providing a “how-to” manual or tracking real trades.

Do you recommend following the model portfolios exactly?
There are always exceptions to any rule.  The savvy investor should use their experience and judgment to try to outperform these models.  Perhaps the best example of when to ignore the models could be seen with its past sales of Apple (AAPL) and Netflix (NFLX).  These stocks moved off our screens due to relative valuation factors while other factors stayed highly ranked.  In other words, these stocks moved from GARP (growth at a reasonable price) territory to growth territory.  An experienced investor might recognize this and hold these stocks as opposed to selling them.

In addition, an investor may want to purchase a stock that has recently moved off a low-quality list due to drastically increased analyst revision momentum.  For the highly sophisticated investor, we provide a weekly update with ranking data as a separate subscription.  We recommend using the model strategies as a guide and not a “how-to manual.”

Do you mange any accounts based on your model strategies?
Yes.  Ascendere currently manages a long-only portfolio based partially on some of the model portfolios in this newsletter and partially based on discretion.

I rather have Ascendere Associates LLC manage an account based on a particular model portfolio strategy.  How do I do this and what are the fees?
Ascendere Associates is a registered investment advisor in New York State, and is willing to obtain registration in other states if there is demand.  We only accept accounts with assets greater than $750,000 at the current time.  This allows us to focus on the research and development of our strategies as opposed to client service and marketing.  Contact us directly for more information.

Our the strategies from your service representative of any real strategy you run?
Absolutely not.  The models in this newsletter do not include any kind of costs, including transaction costs, slippage costs and other.  We use the models in this newsletter as a tool, combined with our discretion based on experience.  In any case, past performance of backtested or real performance or no indication of future performance.

Do you adjust your model portfolios for corporate action announcements, like M&A activity?
No.  Our models are based on factors alone, and not on pending corporate actions such as mergers.  We suggest readers use their own judgment as to whether to include stocks that are potential acquisition targets.

It is not always possible to borrow stock to execute short sales.  Do your models take this into account?
No.  The models and backtests have assumed that the stocks have always been available for short selling.  We would note that there was a period in 2008 the SEC prohibited short selling of certain financial stocks, which our models also have not taken into account.  If a stock is not available for short selling, a reader may keep that portion in cash, rebalance the portfolio with fewer short-sellable stocks, or replace the missing stock with a 75% equivalent position in an inverse ETF.  We do not recommend replacing a missing short sale position with a 100% position in an inverse ETF based simply on our opinion that ETFs offer no edge relative to our stock-specific models.  As always, we urge readers to use their own judgment.

Why do you use the S&P 500 as a benchmark?  Why do you exclude returns from dividends from the benchmark and model portfolio strategies?
We use the S&P 500 because it is widely accessible to all readers and provides a general idea of market direction relative to the direction of the model portfolio strategies.  We do not include returns from dividends in the S&P 500 because we also do not track returns from dividends in the model portfolio strategies.  This is because we track changes in price only for the models.  Most importantly, the models are likely long and short roughly the same amount of dividends because of the initial dollar neutral construction of the model portfolios each month.

A truly relevant benchmark for our model portfolio strategies would be based on all stocks and ADRs that trade on major U.S. exchanges with a market cap above $2 billion.  Hedge fund indices are also available, such as from BarclayHedge, Ltd., but these are updated monthly.  The Barclay Equity Long/Short Index is probably most relevant to our dollar neutral models.

Where do you get your data?
We use data provided by Capital IQ, which is in our opinion one of the most innovative financial data companies in business.

How do you calculate your factors and factor models?
Our models are proprietary.  For some general insight, see our “methodology” section below.

How you determine stock-specific targets and stops?
We take a ratio of a stock’s volatility to determine monthly stock-specific price targets and stops, and use static and volatility-based percentage changes for portfolio targets and stops.  If you wish to set your own stops and would like additional insight into our approach, we can provide some additional detail to paid subscribers.  Please contact us directly.

The Opportunistic Portfolio seems risky in that it could drastically exchange exposure from dollar neutral to 100% long, 100% short.  Are there alternatives?
We have tried different variations of our models in backtests, and did not find any benefit to cumulative gains or the Sharpe Ratio by closing out an entire dollar neutral portfolio or going to a market ETF if the long or short model was stopped out instead.

For example, if an investor were to close out of all stock positions and replaced them with a 75% equivalent position in a S&P 500 ETF instead of going to cash, we found the cumulative return from 12/31/2004 was about 125% with a Sharpe Ratio of 1.37.  If an investor were to close out of all stock positions following the stop of any one portfolio, the cumulative returns would be close to 100% with a Sharpe Ratio of 1.27.  Drawdowns would be lower, but the risk adjusted returns would be worse than our existing Core Model Portfolio.  Our Core Model Portfolio, unlike our Opportunistic Model Portfolio, is always dollar neutral.  At the time of this writing, this model has demonstrated a 209% cumulative return with a Sharpe Ratio of 2.12.

How often do you rebalance the model portfolios?
The model portfolios are typically rebalanced following the close of each month.  However, there will be occasions when intra-month rebalancing is necessary — sometimes we will go long “low-quality” stocks and short “high-quality” stocks based on price momentum factors.  On other occasions, in the Opportunistic Model, we may close out one or both portfolios completely.

Why don’t you update and rebalance your model portfolios more frequently?
Based on a few short backtests and anecdotal observations, we learned that there is no advantage to rebalancing the model portfolios more frequently than month to month.  We think this may be because of highly sophisticated institutional quantitative programs that are shorter-term in nature.  As these quantitative funds chase intra-day price fluctuations and compete on information process speed, a slower-moving quantitative model such as ours may be better able to pick up on general mispricing relative to key fundamental factors.  The advantage of our systems seems to come from its ability to anticipate future changes in stock direction as opposed to quickly reacting to new information.

Do your calculated model portfolio returns include expenses?
No.  Please see the section below, “On costs associated with executing trades based on a model portfolio.”  Currently we assume that slippage, transaction and management fees have a monthly 50bp impact relative to the theoretical model results.