Home
.....
Philosophy
.....
F.A.Q. Bonds.
ABC.bonds
Cv. bonds
How to buy CV.
Bonds diff.
Better way
.....
Hedge Program
.....
Bds.Wk.Update
RESEARCH
.....
Cdn$ cv
US$ cv
Gold bonds
Internet
Euro bonds
.....
Cur.Vitae
.....
Comments
Terminology
BOOK
LINKS
New Page 3

 

MARKET - NEUTRAL HEDGE INVESTMENT PROGRAM

 

This is an introduction to a new technique in portfolio management. This new technique produces a higher investment safety factor, while yielding a conservative superior capital return. This technique is oriented for long term investors ( two years minimum ).

 

The high safety aspect of this concept comes from three principal sources: 1. The natural safety of Convertible Bonds. 2. The diversification program of the "Market - Neutral investment program". 3. An internal mechanism providing a zero investment risk.

 

The "Sheridan, Market - Neutral hedge investment program" is an ultra-conservative yet highly profitable investment strategy. The concept has been engineered to take advantage of the volatility of the market and not its direction. Itís objective is to produce capital gains no matter the direction of the market.

 

The program is a sophisticated strategy with a straight forward approach. It uses a technique known as "hedging" which combines investments in Corporate Convertible Bonds with the short sale of half the underlying common shares. The program goes far beyond the use of normal hedging techniques. Through a mathematically planned model which predetermines short and long goals, in advance, "ELIMINATING THE NEED TO MAKE FURTHER BUY AND SELL DECISIONS", this program is able to generate substantial profits with only small fluctuations in the price of the underlying common share. Equal profits will results, REGARDLESS OF WHETHER THE FLUCTUATIONS TAKE PLACE ON THE DOWNSIDE OR THE UPSIDE..

 

Reasons to engineer a hedge program:

 

The action of buying a convertible bond, locks in the safety of the placement.  Now what is left to do is to capture a capital gain, every time there are minor oscillations in the price of the common shares.

Too often do we see an investment increase substantially, just to come back to the original buy price some time later, without having captured any capital gain.  It is really frustrating, we have all experienced that situation. 

Well, no more, with this hedge program, we will "capture" and "lock-in" capital gains with only small fluctuations in the price of the common share, whether that price, increases or decreases.

 

 

                                        (THE MECHANICS)

 

EXAMPLE:    Buy 10 bonds, conversion ratio is 60 shares/bond, the result would be ( 10 X 60 = 600 shares ).                 

The very first step is to calculate the amount of common shares that your bonds are convertible into.  In the example, it would be 600 common shares.

The second step is to sell half of the underlying common shares.  Position "A" below.

The third step is to calculate the price at which you wish to sell the   "second half" portion of your common shares.  This is your long term goal on the uptrend.  Position "B" below.

The fourth step is to calculate the price at which you would like to buy back the original sell order (step A).  This is your long term goal on the downtrend.  Position "C" below.

RESULTS:  

If the price of the underlying common shares increases, you make a profit on the sale of the  ' second half ' portion of your underlying common shares.  (position "B"). 

If the price of the underlying common share decreases, you make a profit by buying back at a lower price, (position A), the original sale as in  (position C).

You make a profit, whether the price of the underlying common share, increases or decreases

If you buy back your shares (position C), you are back to the start by owning the convertible bonds + the profit that you made in your transaction.  (You still collect interest on your bonds + interest on the amount of capital gain deposited in your account.

If you sell the second portion of your common shares, (position B), you are then left in a "full hedge position" + the capital gain that you made.

In a "full hedge position", you have nothing invested, you are (long 600 shares through the convertible bonds, short 600 shares in your account.  You are still collecting your interest on the bonds, (you have not converted the bonds), in your margin account you have recouped the original investment cost + the capital gain that you made.  You are also collecting interest on that full amount that is deposited in your account.  That is a double "wammy". 

 

 

( B )   LONG TERM GOAL......(sell 300 shares)...............(  UPTREND )

 

( A )  1 / 2 POSITION...............(sell 300 shares)......( ORIGINAL SALE )

 

( C )  LONG TERM GOAL........(buy 300 shares)........( DOWNTREND )

 

 

 

This program, as you can see is excellent, the main drawback is that on the sell side " in practical term ", the difference between the original sale (step A) and the price at which you have to sell the remainder common shares ( step B ) in order to reach a break-even point is too large.  ie:  an increase of approximately 70%. 

 

 

                                 (  T H E  M E C H A N I C S )

 

                                     (  I M  P R  O  V  E D  )  

 

We already know that on the sell side, the "unique" sell step is much too wide for any practical purposes.

THE SOLUTION:  The solution is to simply add more trading steps to the program, thus reducing the "spread" between steps.

Let us use the same example as above.  (buy 10 bonds, conversion ratio is 60 shares /  bond, the result would be ( 10 x 60 = 600 shares ).

 

Here are our new trading steps:

 

( D )  LONG TERM GOAL...(sell 100 shares)...........(UPSIDE)

( C )  SUB-GOAL #2...............(sell 100 shares).....( UPTREND)

( B )  SUB-GOAL #1...............(sell 100 shares)......( UPTREND)

 

( A )  1/2 position.....(sell 300 shares).........(ORIGINAL SALE)

 

( E )  SUB GOAL #1...............(buy 100 shares)...(DOWNTREND)

( F )  SUB GOAL #2................(buy 100 shares)...(DOWNTREND)

( G )  LONG TERM GOAL...(buy 100 shares).........(DOWNSIDE)

 

SELL SIDE:

If the price of the common share increases (from the level where we have sold our original 300 shares) to the price of our sub-goal (B), than we would sell 100 shares at that price. 

If the price of the common share increases further to the level of sub-goal #2 (C), than we would sell 100 more common shares at that price.

NOW, if the price of the common share should decrease from the price at level (C), back to the price of level (B), we would buy back the 100 common shares sold at level (C) at a lower cost, thus locking-in a capital gain.  ie:  Sell 100 shares at level (C) ($25.00), buy back 100 shares at level (B) ($20.00), capital gain =  $5.00.

 

BUY SIDE:

If the price of the common share decreases (from level (A) where we have sold our original 300 shares) to the price of our sub-goal (E), than we would buy back 100 shares sold at (level (A)) at a lower cost, thus locking-in a capital gain. 

If the price decreases further from the price at level (E) to the price at level (F), we would buy 100 more common shares, (originally sold at level (A), creating another capital gain. (sell 100 shares at level (A), buy back 100 shares at level (F).

NOW, if the price of the common shares increases from the price at level (F), back to the price at level (E), we would then sell 100 common shares.

 

CONCLUSION:

With this "improved" program, we can reduce the spread on the sell side from the original program of approx. 70%,  to a minimum spread in the "improve" version of 15% between steps.  Every time the price of the common share increases or decreases by 15%, we can initiate a buy or a sell transaction.