Author: Brendan Ruchert-Dixon

Covestor models: Alpha Trapper and Beta Blocker

The first month of 2012 was a somewhat disappointing one for the Alpha Trapper portfolio, both in absolute and relative terms. While the overall equity market rose, my heavily hedged set of exchange traded funds, or ETFs, offset each other for minimal gains. Meanwhile, Asta Funding (ASFI) - my largest holding - lost 6.14% on the month.

It seems ASFI's share decline may in part be due to investor fear regarding the management's recent decision to venture beyond its core business of purchasing, selling and servicing consumer receivables into the arena of personal injury settlement financing.  Some believe this is risky, considering it is outside of Asta Funding's core debt-collection expertise.  While they may be right that losses are more likely than simply holding all cash, and I would have preferred an increased dividend or heavy share buyback, I think the potential reward still warrants some risk.

While they are not experts in personal injury financing, ASFI is partnering with a group with quite a bit of experience in the field.  Also, the company has put several safeguards in place to limit potential losses. First, the company will not invest more than $21.8 million per year in the venture. (That amounts to only about 20% of the company's recent cash position.) Secondly, they can cancel the venture after a year (or after two and three-year periods) if the previous year was not profitable.

As far as my macro view, I have not abandoned my caution in the face of the market gains in January.  If anything, I think the risk of broader market losses is a little greater now, as investors have become more optimistic in the face of so many unsolved economic problems and crises.  I may take an outright bearish bias if the market rises much more.

In the meantime, I'm still looking mostly for absolute return opportunities.  Toward that end, in January I opened a paired short trade in ProShares Ultra DJ-UBS Crude Oil (UCO) and ProShares UltraShort DJ-UBS Crude Oil (SCO) -- two oil-based, leveraged ETFs. I also increased my paired trade in ProShares Ultra Silver (AGQ) and ProShares UltraShort Silver (ZSL), a duo of silver-based leveraged ETFs.