It’s official. Balhiser LLC now contains a proprietary trading group which manages a private fund. The fund, dubbed Sigma 1 (Σ1), seeks to be a covered-call balanced fund for the benefit of Balhiser LLC shareholders. Balhiser LLC’s initial investment in the fund is a modest $25,000. Like the CIA (Crazy Ivan Account) Σ1 is, in part, a test vehicle for trading and investing strategies. Unlike the CIA, Σ1 is a Balhiser-LLC-owned tool to put my theoretical fund management skills to the test.
As fund manager, I plan to apply more rigor than necessary for an LLC proprietary trading group. I plan to draft unaudited quarterly reports. I have crafted an outline of fund rules and guidelines.
With direct access to markets and exchanges, very low trading costs, and access to futures, options, forex, margin, algorithmic trading, etc., Σ1 should allow testing of trading strategies that were simply not practical before.
Despite the myriad choices available, Σ1’s initial ground rules and objectives will be pretty pedestrian. Here a some of them for the record:
Conceptual target allocation: 40% bond, 60% stock.
Bond Portion Parameters:
- Duration 0-7 years.
- Max. Foreign Exposure: 50%
- Max. Corporate Exposure: 50%
- Munis: 50% max
- Mortgage-backed : 50% max
- Treasuries/TIPs/Govt: 25% min
- Bond ETFs: Yes
Stock Portion Parameters:
- Foreign: 40% max
- Any single stock: 20% max
- Total single stocks: 50% max
- Diversified (largely index) ETFs: 50% min
Other parameters:
- Max Overall Stock Exposure: 80%
- Max Overall Bond Exposure: 60%
Margin:
- Never to exceed:
- 60% of NPV of holdings
- 100% of NPV of bond holdings
Stock Options:
- Covered calls: Yes
- (Cash/Bond)-Covered puts: Yes
- Uncovered puts/calls: only allowed intra-day while closing covered positions.
- Buying puts/calls: Yes, not to exceed 5% of NPV of holdings.
- Paired options (e.g. butterfly): Yes, VAR not to exceed 5% NPV.
Futures: TBD
Other Options:
- interest-rate: TBD (likely only as bond hedge)
- currency options: TBD (likely only as foreign-bond hedge)
Stock (ETF) Futures: TBD
Commodities:
- Futures: No
- Precious metals (ETFs): Yes, 10% max
- Covered calls: Yes
- Buy puts: Yes, as hedge
- Buy calls: Yes, 2% NPV max.
- Non-metal: No
“Uncovered” (value at risk) Derivative Exposure:
- Total 5% NPV max (on any trading day).
“Uncovered” Derivative Loss Limits:
- Not to exceed 10% in 4 rolling consecutive quarters. (10% of 4-quarter average starting NPV).
- How enforced: If previous 3 (or 2 or 1 or present) quarter(s) uncovered net derivative loss (NDL) is in excess of 5%, max uncovered-derivative VAR cap is lowered to 10%-NDL.
Short-selling:
- TBD, likely only allowed as a hedging technique.
Futures Options: TBD
That is a brief outline of Σ1. I will be providing updates as it moves forward.
Disclaimer: Σ1 is a private proprietary trading account and is not available to the public. Balhiser LLC is a privately-held company.
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