Energy-Focused Master Limited Partnerships (MLPs) Require Risk Management

Robert Boslego - INO.com Contributor - Energies


Energy-focused master limited partnerships (MLPs) have provided investors good returns over time, much better than owning crude oil futures. For example, from January 200 through July 2016, the Alerian Total Return Index (PACF:AMZX), a leading gauge of energy MLPs, provided a return of 867%, far exceeded the return from crude futures of about 63%.

However, there is reasonably strong correlation between AMZX and crude futures prices. As a result, AMZX has suffered some large drawdowns. It maximum drop from peak-to-valley (P2V) was 58% over the period mentioned above. I use P2V as my primary risk measurement because it shows how large a loss one may experience in a buy-and-hold strategy.

I tested hedging AMZX by maintaining a short position in crude futures. The risk-minimizing hedge ratio for crude futures was -17% but it only reduced the maximum P2V to 50% (see Hedged return in graph below).

Chart of AMZX, Crude Futures and Hedged

I therefore applied the risk management process I developed to determine when to be invested in AMZX and when to go to cash. I provide the citations for the mathematical formulae and back-tested results for anyone interested in utilizing this process below. Continue reading "Energy-Focused Master Limited Partnerships (MLPs) Require Risk Management"

The Hot Utilities Sector Needs Risk Management

Robert Boslego - INO.com Contributor - Energies


Because the yield in fixed income has remained so low for so long due to the Federal Reserve maintaining low interest rates, investors have transitioned to utilities because they want dividend yields. As a sector, utilities are up 21.96% year-to-date, 24.7% over the past year and provided an average return of 15.78% per year over the past three years.

Graph of XLU Prices

To participate, the exchange-traded fund (ETF) Utility Select Sector SPDR ETF (PACF:XLU), tracks the price and yield of the Utilities Select Sector Index. The largest holdings of XLU are as follows: Continue reading "The Hot Utilities Sector Needs Risk Management"