Hedging is a way to get portfolio protection. It offsets losses by taking an
opposite position in a related asset. Hedging strategies usually involve
derivatives, such as options and futures contracts.
Consider hedging as a proactive measure akin to insurance. When you
choose to hedge, you are taking control of potential adverse events and their impact on your finances. While it doesn't prevent negative events, the impact can be significantly mitigated if they do occur and you are properly hedged.
Hedging against investment risk means using strategic financial
instruments - market strategies - to offset the risk of adverse price
movements. When your manager hedges investments, they can utilize a
variety of strategies to lower your exposure to risk.
These are financial instruments whose value is derived from the value of an underlying asset, index, or interest rate. They are commonly used for
hedging purposes due to their flexibility and ability to provide exposure to various market factors. Examples of this include:
Similar to futures contracts, forward contracts are agreements to buy or sell an asset at a specified price on a future date. However, forward contracts are typically customized and traded “over the counter,” while futures contracts are standardized and traded on exchanges.
Swaps are financial agreements between two parties to exchange cash flows or other financial instruments based on predetermined terms. Common types of swaps include interest rate swaps, currency, and commodity swaps.
Short selling involves selling borrowed securities with the intention of
buying them back at a later time to return to the lender. Short selling can be used to hedge against declines in the value of a long position in the same or related assets. A fun way to learn more about short selling is to watch the movie The Big Short, based on the story by Michael Lewis.
Asset allocation involves diversifying a portfolio across different asset
classes, such as stocks, bonds, real estate, and commodities. This can spread risk and enhance returns. A manager can help you allocate assets
strategically, thus striving to reduce the overall risk and hedge against
adverse movements in specific markets or sectors.
There are various options strategies, such as spreads, collars, and straddles. These hedge against specific risks or can enhance portfolio returns. These strategies involve combining multiple options contracts to achieve the desired risk-return profiles.
Index funds and exchange traded funds (ETFs) provide exposure to a
diversified portfolio of securities within a specific market index or sector. By investing in these funds, you can hedge against individual stock or
sector-specific risk while still participating in broader market movements.
In some cases, investors may choose to hedge their investments by holding cash or cash equivalents, such as money market funds or short-term treasury securities. Holding cash can provide liquidity and stability during market downturns, allowing you to take advantage of buying opportunities or meet short-term financial obligations without selling other assets at a loss.
It would be expensive and risky to go about your everyday life without
insurance - for your health, car, home, liability, or vacation. An experienced manager can help you participate in various strategies that can act as a type of insurance. They can assist in deciding what types of hedging strategies will be appropriate for your specific risk tolerance, investment objectives, and time horizons. Even when the market outlook is dubious.
Vineyard Global Advisors offers 13 fee-only, actively managed,
including hedged and long-only investment strategies via
separately managed accounts. Contact Us to learn more.
