ALPHA INDIA – INTRODUCING VALUE SHEET
By Orpheus | Published: 14 September, 2009
Pair trading has a lot to do with hedging the value of two assets. The enclosed value sheet illustrates the quantity of future contracts (or units) to be bought and sold to get a value hedge. As you can see we have used Betas of both the stocks against Nifty and created a value ratio. Near 1 value ratio suggests that the hedge is proper and running. The value sheet will be carried as an annexure to Alpha India every day. We have classified the value sheet into three types based on trading usage.
BETA SHEET
Beta sheet illustrates the beta values for various stocks covered in Alpha as pairs.
BETA: Sensitivity of a stock to the market benchmark (NIFTY)
VALUE HEDGING: When beta’s of the two asset taken in a pair are similar we are hedging values (equating) of the two assets.
PROBLEMS WITH BETA HEDGING: Beta hedging is used when value of the assets are different. To keep the hedge value constant, beta is tracked over the hedged time horizon.
TIME ARBITRAGE: Unlike mean reversion, time arbitrate aka performance cycles is based on time fractals.
8 SIMILAR BETA PAIRS: We have carried 8 pairs with similar beta.
BETA CALCULATION: We used three years of beta data (1 yr, 2 yr, 3 yr) and looked for similar beta pairs.
MEAN BETA: Mean beta takes the average of beta value over the 1, 2 and3 yr period.
BETA TRACKING ERROR: Beta tracking error comes into place when we are not doing value hedging.
MARKET POLARITY AND PERFORMANCE CYCLES: Value hedged pairs should not be effected by market direction (polarity)
STERLITE CROSSES 10%
The latest ALPHA carries the running portfolio. Our initiated LONG on STERLITE and SBI has returned 11% and 6% respectively.
ALPHA.IND.140909 Download the report
ALPHA is a pair trading, long only and short only strategy product based on TIME fractals. Time arbitrage, Time Triads, Time fractals are terms coined by Orpheus Research. The signals are carried over three different time frames viz. sub minor (2-3 days), minor (10-30 days) and intermediate (above 30 days). This is a daily signal product. The signals will be illustrated through tracker and running portfolios. Alpha can be used by fund managers for relative allocations, traders for leverage bets and high net worth clients for selective trades. This is a part of the time triads analytics developed by Orpheus Research.
TIME ARBITRAGE portfolio has five pairs now viz. Reliance – Nifty, CNXIT-Nifty, TCS-Nifty, CNXIT-Infosys, Nifty-ONGC. The above tracker will be updated on a daily basis. The freshly opened trades will have the shortest holding periods. The type of trade will be depicted in the degree i.e. sub minor (2-3 days), minor (10-30 days) and intermediate (above 30 days). The legs should be risk weighted before any implementation. We are assuming a running stop loss of 4% per traded pair. CNXIT/INFOSYS means LONG CNXIT, SHORT INFOSYS. This also means +A-B. When the pair inverts to INFOSYS/CNXIT, it would mean SHORT CNXIT, LONG INFOSYS meaning -A+B.
LONG ONLY, SHORT ONLY portfolio covers NIFTY, CNXIT, NSEBANK, RELIANCE, INFOSYS, ONGC, CIPLA, ICICI BANK, HDFC BANK, TISCO.
STOP LOSS AND EXITS are activated at 4%
Please feel free to mail us for any clarifications. *This is a strategy product. Long Short strategies are not riskless strategies. Please mail us for a detailed working or consult a local financial risk manager to execute these pairs. For more details please subscribe to the ORPHEUS TIME ANALYTICS research products.
