New York (HedgeCo.Net) Over the course of the last few months, the S&P 500 has been caught in a narrow range with all closing prices being between 2,131 and 2,079 for a range of 2.5%. While the overall market has been choppy without really going anywhere, the HedgeCoVest Basic Materials Short-only model has gained 8.11% over the course of the last 30 trading days and it gained 9.4% from May 8 through June 25.

Looking at a snapshot of the model, you can see that the standard deviation is 16.76% with a maximum drawdown of 6.43%. The model also has a high inverse relationship to the overall market as evidenced by the Correlation of -0.8.

The HedgeCoVest Basic Materials Short-Only model is one of the 15 composite models on the platform and one of five short-only models. The portfolio is made up entirely of bearish trades within the basic materials sector. The trades are generated from all participating fund managers where an algorithm is used to filter trades and it considers a number of factors before creating the model itself. Factors include percent of capital committed by the managers and the liquidity and market capitalization of the securities being traded.

The model shows a current allocation breakdown within the basic materials sector of 66% of funds being allocated to short positions on chemical companies, 22% to mining companies and 11% allocated to iron and steel companies. The model is actively managed with two or three names changing within the top five holdings over the last three weeks.

The active management style has benefitted the model as evidenced by the 9.4% return going back to May 8. Considering that the Materials Select Sector SPDR is only down 3.42% over the same time period, you can see the value that the managers add. The model isn’t just benefitting from a downswing from the materials sector.

Potential investors may choose to allocate to the Basic Materials Short-Only model for any number of reasons. It could be part of an overall diversification plan or it could be that the investor is bearish on the sector and wants to take advantage of any downturn from the sector. If an investor has a primary portfolio that is made up mostly of materials stocks, the investor could use the model to hedge the primary portfolio.

Regardless of the reason for allocating to the model, we believe the HedgeCoVest Basic Materials Short-Only model can help investors by diversifying their portfolio and giving them protection from any downswing in the sector or overall market.

Rick Pendergraft
Research Analyst
HedgeCoVest