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TheStreet Open House

Hedge Your Hedge in Precious Metals

Stocks in this article: GLTRUGLGLDGLLZSLAGQ

The past three months would seem like the worst time to be short a long leveraged ETF in precious metals. In fact, UGL has outperformed the SPDR Gold Trust (GLD) by almost exactly 2 times, which is its daily leverage mandate, whereas AGQ has performed about 2.5 times better than silver. But even in that environment, this setup performed slightly better than just a purchase of GLTR alone. Obviously, the slight outperformance was due to palladium, but I believe there will still strong performance in both palladium and platinum going forward. Also, if this is a hedge against fear, inflation and even equities, then slightly longer positions in palladium and platinum should offset some of the underperformance in gold and silver if the economy strengthens and the bullishness wanes for "safe haven" plays in precious metals.

For those looking to increase the GLTR position to $2,000, but believe a trend -- whether it be bullish or bearish -- is likely, then a simple flip can be done. Rather than shorting shares of UGL and AGQ, a trader would buy the corresponding dollar values from above in the ProShares UltraShort Gold (GLL) and the ProShares UltraShort Silver (ZSL). If gold and silver continue to move higher in a trending fashion, then the daily reset will result in these falling at slower than a 2-times rate over a longer period. If gold and silver were to fall in a continuous and trending fashion, then these two positions will see performance close to the 2.5-times performance AGQ has shown over the past three months. Either way, a trend will most likely result in better performance. Of course, in either scenario a trader could use longer-dated deep in-the-money calls or puts rather than going long or short shares. I especially prefer the use of puts over shorting shares if the cost of time is reasonable. It's something to keep in mind since shorting leveraged ETFs involves borrowing costs and call-in risk.

Hedges are useful tools for many portfolios, but sometimes our hedges can be just a bit better if we hedge them as well.

At the time of publication, Collins was long AGQ puts and short ZSL calls.

Timothy Collins has worked as a financial adviser since 1999, focusing on portfolio customization, with a concentration on correlation arbitrage and risk-managed growth. He started Collins Capital Advisors in 2007, which has evolved into TangleTrade Management, LLC. TangleTrade is an RIA firm dedicated to formulating customized risk-managed investment strategies for individuals and small businesses. TangleTrade Management now manages the TangleTrade Fund, a correlation arbitrage hedge fund utilizing the trademarked InterETF strategy.

Prior to joining his first firm, American Express Financial Advisors, in 1999, Collins worked as a staff accountant for United Information Systems in Bethesda, Md. He has also worked as a financial analyst for Securities Pricing and Research in Annapolis, Md. Collins is a graduate of McDaniel College (formerly Western Maryland College), with degrees in business administration, economics and sociology and is a winner of the Bates Prize.

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