Hedging
Hedging is a strategy to get portfolio protection. A risk management strategy employed to offset losses in investments by taking an opposite position in a related asset, it protects an investment from risky situations that might lead to financial losses. As it does not guarantee complete assets protection, Hedging makes sure that losses will be mitigated by gains in another investment. The reduction in risk provided by hedging also typically results in a reduction in potential profits. Hedging strategies typically involve derivatives, such as options and futures contracts.
Experts
Andreas Clenow
Arik Ben Dor
Brett Friedman
Carley Garner
Dan Passarelli
David Shimko
Davis Edwards
Dean Curnutt
Diego Parrilla
Don Singletary
Fischer Black
Francesca Taylor
Galen Burghardt
George Pruitt
Gianna Bern
Guillermo Dumrauf
Lex van Dam
Mahmood Noorani
Matt Rowe
Meb Faber
Michael Covel
Michael Kahn
Michael Lebowitz
Mish Schneider
Richard Sandor
Scott Skyrm
Slobodan Jovanovic
Theodore Barnhill
Vincent Catalano
- Hedging is not an investment strategy in itself
- Hedging is a form of insurance - you only need it when you're doing something else
Equity Hedging Strategy Using Beta
- Ex: MSFT has beta 2.00 and is 20% of your Portfolio (20k)
- Ex: MO has beta of .90 and is 80% of your Portfolio (80k)
- Ex. SPY has Beta of 1.00, QQQ has Beta of 1.19
- Ex. Solve for X: X * (1.00) + (1 - X) * 1.19 = 1.12 ; X = .37
- Ex. 37% of Hedge should be SPY, 63% of Hedge should be QQQ
- Ex: Buy 37,000 notional of SPY puts
- Ex: Buy 63,000 notional of QQQ Puts