Covestor model: Opportunistic Arbitrage
The Opportunistic Arbitrage model lost a disappointing 5.8% in March versus a 3.1% gain for the benchmark S&P 500. This model typically outpaces the major indices by a large margin in up periods so the last month was a major exception.
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Since the end of 2011, this model has been running on the theme that the majority of stocks would retrace the losses experienced since the July 2011 levels. In essence, our theory has been that losses since that time period were from irrational fear of a second financial collapse that the Europeans were unlikely to allow. Naturally this fluctuates on a case by case basis where any individual stock could move a lot higher or lower depending on circumstances since then.
Unfortunately this theory took a major turn in March as investors piled into dividend paying stocks sending most major indices higher while at the same time selling the higher risk, global growth stocks. In some cases, it was just a small reversal of the gains from the last couple of months, but it other cases some stocks continued to face relentless selling pressure.
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Some major gains occurred in the positions of Liz Claiborne (LIZ) and Monster Worldwide (MWW) as both companies gained from speculations of takeover bids. In either case, this model would be happy to take a premium bid and roll the money into other cheap stocks, but neither stock was bought specifically for the takeover theme. Both stocks remain incredibly cheap, probably a contributing factor to the buyout themes.
Those gains were swamped by major losses in AerCap Holdings (AER), SodaStream (SODA), Terex (TEX), and numerous other stocks. For the most part, the selling just makes these stocks cheaper. Fluctuations will occur in some of these volatile stocks, but ultimately the expectation is that prices will eventually end up higher, making the reward worth the risk.