Do you hedge?

[mcgene4xpro]

Quote from bone:

Let me just say that if your original strategy was to take directional risk, and then you choose to "hedge" it when things start to go South on you, then I would completely agree that hedging would be a complete waste and in fact might make things worse. In that scenario, it would be best just to take your lumps and move on to the next opportunity.

However, having said that, please keep in mind that most bank and fund traders utilize some sort of delta-neutral designed relative value strategy. Technically, they are hedged, but the objective is always to capture the difference between two ( or several or many ) instruments through price convergence or divergence.

How about combining a trending following and counter trending strategies at the same time.. With independent target profits, you will find your self hedging safely. Am i right? Does any do this? If so, please share.

Thanks
McGene

 

[dwpeters]

Quote from mcgene4xpro:

How about combining a trending following and counter trending strategies at the same time.. With independent target profits, you will find your self hedging safely. Am i right? Does any do this? If so, please share.

Thanks
McGene

My strategies with a trending component have a correlation to the market of about 75%. My counter trend are more like 25% to the market and to those with the trending component, so there is still some significant market risk. My short strategies have very low to negative correlation and that significantly reduces downside volatility.

 

[Hugin]

Quote from Ghost of Cutten:

Another example is being short some stocks to offset your longs. If you are right on your shorts, then they add alpha whilst reducing volatility of returns, both of which are desirable. This is the whole idea behind things like 130/30 funds.

This is one of the more common reasons to hedge - extract alpha and reduce volatility. In any case this is why we do it.

IF the strategy has enough alpha this will reduce market risk and result in higher sharpe ratios. You can always add risk by leveraging, so if the strategy is any good you could end up with higher returns with same risk.

/Hugin

 

[OddTrader]

imo, hedging is all about risks. In investment and trading, there are 3 major risks above others.

I think the risk of money price ( interest and exchange rates) should be relatively small for most traders doing short term trades.

The risk of commodity price would be most important for directional traders. This kind of hedging costs profits and consequently reduces rerturns. Personally I have proper hedging all the time. I know it's very expensive indeed.

Systemic risk affects your assets portfolio when black swan appears once in many years. To hedge or not to hedge as well as how to hedge should be really an issue that might be better delegated to specialists. Theoretically, perhaps the aim of hedge funds is for hedging systemic risk.

Quote from mizhael:

Hi all,

Do you add an overlay of hedges on top of your systematic portfolio?

I am a bit clueless about how to do hedging...

Granted, if you achieve perfect hedges, you end up having no return...

When Jim Rogers said that he's long commodities and he's hedging via shorting Nasdaq and EM stocks, he's probably putting on the hedges based on experiences and intuition.

Is there a way to quantify the hedges?

There must be a trade-off or optimal point about hedging... and about adding hedges to your portfolio.

Any thoughts?

Thanks!