Should I Short The Nasdaq($QQQ) ?

By: ispeculatornew
Date posted: 10.27.2014 (3:00 am) | Write a Comment  (5 Comments)

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qqqAs an investor, I believe in a few basic principles that guide my overall strategy. Most of my investments are concentrated into 2 key elements:

-My diversified, passive investing ETF portfolio
My Ultimate Sustainable dividend portfolio

Both of those are highly diversified and I can sleep without any problems even if we do see another big market crash.

Another sector of my investments that is starting to worry me a bit more however is my technology stock investments. I’m not as worried about my long & short tech stock picks because they are “long & short” and thus would not be expected to do better or worse no matter what the market turns into. However we not get to the “problem”. I have my longer term speculative picks which are a growing part of my investments. I have made 1 in each of the past 3 years:

2012: Facebook (FB)
2013: Apple (AAPL)
2014: TripAdvisor (TRIP)

Not only are they very significant investments from the start but the first two have done extremely well. I have no intention of selling in the near future and will likely make more such picks.

Why Are My Long Term Speculative Picks All “Tech-Related”?

The main reasons are of course that I believe that is where I have the best understanding of the companies, the environment and can make the best “picks” The big danger of course is that as will happen with other sectors, the tech stocks will most certainly go through another bubble. For technology stocks, it’s very easy to remember the last one where many dot com stocks did not even make it. I’m not sure I want to have 20-30% or more of my assets so vulnerable when something like that happens.

Solution = Shorting The Nasdaq?

By selling an ETF that tracks the Nasdaq Index, I would certainly be better protected if such an event occurs but there is of course the downside that I’d be paying to borrow the ETF. Also, if ever my stock pick returns are mainly due to the overall market, those returns will basically be “zero”. I’ll be long names that have gained big but shorting an index that has done the same. I decided to look at charts for the 3 names to see how they’ve done in comparison to QQQ:


ycharts_chart (1)

ycharts_chart (2)

It’s still very early to tell on TRIP but clearly the other 2 would have done extremely well even if I had those shorts.

What My Portfolio “Could” Look Like

Instead of owning $100K of tech stock names for examples outright. I could own:

-$100K of Tech stock names
-Short 100$K of the Nasdaq (through a short on QQQ)

This would make my strategy “cash neutral” more or less and would allow me to invest it in a more diversified manner.

I started considering this after hearing that many tech venture capitalists have such a strategy in place to limit their exposure to the sector since they generally have a significant portion of their savings invested in their own funds.

Any Thoughts?

I’d love to hear your thoughts on the subject. I’ll certainly be looking into the cost of such a strategy (basically how much the borrow on QQQ typically goes for). You could argue that QQQ is not the ideal hedge since holding a “internet stock” ETF would have more correlation but I fear the cost of such a “perfect” hedge would outweigh the additional benefits.

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  1. Comment by Ken — October 29, 2014 @ 10:00 am

    If you want to hedge your position, the best way is your own pairs strategy, I think.

  2. Comment by IntelligentSpec — October 30, 2014 @ 4:10 am

    Not a bad idea but I see 2 big issues:

    -those trades are fairly volatile
    -It seeems much more difficult for me to open very long term long & short trades.

    Any thoughts? Thanks for the feedback Ken!

  3. Comment by Ken — October 30, 2014 @ 6:28 am

    You’re right that it’s hard to maintain long-term shorts. You have to worry about stock-borrow fees and other problems.

    Another way to hedge is to just buy some cheap deep out of the money puts on your long-term long positions. That’s what I do when I go on vacation.

  4. Comment by IntelligentSpec — October 30, 2014 @ 6:33 am

    like 1-2 years out or shorter and then roll them? Would have to look into cost of doing that but it’s an interesting idea.

  5. Comment by Ken — October 30, 2014 @ 11:17 am

    I would just buy the Januarys and roll them.

    Another possible hedge is to convert your long position to long-term calls. But this gives up the possibility of long-term capital gains on your position, because (at least in the States) options are always taxed as short-term, regardless of holding period.

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