Do you hedge?

[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!

 

[mcgene4xpro]

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!

Most professional traders say hedge is waste of time and useless. They said one has to accept the lose and continue..

 

[trefoil]

My risk profile at EOD today:

This was accomplished with a mix of shorting the underlying, and buying some 60 puts and calls. I'm betting on a downer on the open tomorrow in gold on some profit-taking. After that I'll probably go long, but not sure yet.
My system says I should be long. What you actually do is always up to you though. Reason why I'm leaning more short than long was that we had a very good day today on gold, so I figure a bit of profit-taking on the open is probably going to take place.
My point is that hedging doesn't necessarily imply something that would kill your returns. You have to structure them so that you can make money in as many ways as possible.
My average holding time is a day and a half, so I only use weekly options to hedge. I stay positive gamma because the probabilities on weekly options heavily favor that, in my opinion. Gold is volatile anyway, so given that, being negative gamma would be silly most of the time regardless.
If the price doesn't move at all on the open tomorrow, I'll lose, as both the puts and calls would lose on dropping IV and on theta, btw. That image doesn't show that risk.

 

[FrankSlaughtery]

mcgene4xpro - why does it matter what "professional traders" say? Shouldn't you (in general not you) do what's best for you in terms of risk management? Talk to the so called professional traders that didn't hedge after the '87 crash, 9/11, etc. You didn't just take a loss - you were wiped out or in debt to your clearing firm. I don't want to start a fight on ET (we have enough of those already) - just saying that hedging is necessary to live another day. This can be accomplished by buying OTM puts to hedge equities or OTM calls to hedge commodities since they have a greater chance of gapping up due to supply shocks. Smaller position sizes/diversification is another way to hedge. Yes, you will make less money hedging (both from loss on hedge which means you made money and/or from opportunity cost) but it's better than always worrying about a rogue swan that will one day take you out.

 

[mcgene4xpro]

Actually, i have mentioned the professional traders opinion exactly to elicit an ET to respond. Your response is what i waited for to read. Thank you for sharing.

Quote from FrankSlaughtery:

mcgene4xpro - why does it matter what "professional traders" say? Shouldn't you (in general not you) do what's best for you in terms of risk management? Talk to the so called professional traders that didn't hedge after the '87 crash, 9/11, etc. You didn't just take a loss - you were wiped out or in debt to your clearing firm. I don't want to start a fight on ET (we have enough of those already) - just saying that hedging is necessary to live another day. This can be accomplished by buying OTM puts to hedge equities or OTM calls to hedge commodities since they have a greater chance of gapping up due to supply shocks. Smaller position sizes/diversification is another way to hedge. Yes, you will make less money hedging (both from loss on hedge which means you made money and/or from opportunity cost) but it's better than always worrying about a rogue swan that will one day take you out.

 

[AK100]

You're paid to accept risk in this game. If you want to hedge then you reduce risk and hence reduce your potential reward as well.

Can't have it both ways. PLus, there's a cost of hedging which will further reduce any potential rewards so much so that it all becomes pointless.

 

[mcgene4xpro]

Quote from AK100:

You're paid to accept risk in this game. If you want to hedge then you reduce risk and hence reduce your potential reward as well.

Can't have it both ways. PLus, there's a cost of hedging which will further reduce any potential rewards so much so that it all becomes pointless.

Here is one of the pro opinions. Thanks for sharing..

 

[Ghost of Cutten]

Yes, you should always try and hedge the risks that you aren't willingly taking. For example if you think silver will outperform gold, but don't have a view on the overall precious metals market, then you should be long silver and short gold, rather than just long silver. Otherwise you could be totally right that silver will outperform gold, and still lose money because silver drops 5% and gold drops 6%.

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.

 

[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.

 

[dwpeters]

Quote from mizhael:

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

Rarely, and I've pretty much moved to long/short trading. In a bull market there are opportunities to profit shorting and in a bear market there are opportunities for profit on the long side. I may lean bullish or bearish but I'm always trading both directions. So I don't hedge so much as I trade uncorrelated strategies. If compound interest is the 8th wonder of the world, then maybe diversification should be the 9th. It truly is something for nothing.