Yes or No:"Fully hedged portfolios are not risk free"?

if you had a fully hedged portfolio of gold, t bonds, bunds, equities from US, Europe, Japan and emerging markets, the euro, the yen, swiss franc, oil, natural gas you would've lost a lot of money in May wouldn't you?
 
Quote from drsteph:

Not to be glib, but from what I can tell about these scenarios historically, the best thing to do is to have capital ready to allocate to severely depressed assets after the panic....
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Not only are you not being glib, but it is probably the holy grail of managing large amounts of money and being able to run these sorts of (statistical ) strategies.

Most of the media tell you that (Hedge) funds are overleveraged. When in fact most (smart) Hedge funds are grossly underleveraged. So if a fund is managing say $1B, perhaps they have $500M in the market "speculating" at risk (the VaR), they have the rest in treasury bills, notes or bonds or perhaps other more exotic interest bearing securities. In other words, they rarely if ever use leverage to get alpha.

When the shit hits the fan, they have models that they use (since there is so little data on "crashes" there is also some artistry) to sell a portion of their beta positions into the buying of US securities (flight to quality) to raise cash, and using the money to buy cheap distressed "securities." All it takes is massive patience and a willingness to underperform the most aggressive funds in the short run.

But you never go broke, and you let your alpha strategies do the hard work day in and day out.

nitro
 
Quote from nitro:

...
But you never go broke, and you let your alpha strategies do the hard work day in and day out.

nitro
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I should have said:

"But you never go broke as a result of overleveraging and having to exit good positions prematurely as a result of margin calls, and you let your alpha strategies do the hard work day in and day out.
 
Quote from OddTrader:

How about insurance premium?
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Good point.. if you are talking about buying an option to hedge a position.

My thoughts were along the lines of using futures contracts to offset the risk of holding the underlying or vice versa. Here, the only risk is the cost of carry, which can be likened to an option premium, but unlike an option, there is no upside potential.
 
Quote from Mr B:

if you had a fully hedged portfolio of gold, t bonds, bunds, equities from US, Europe, Japan and emerging markets, the euro, the yen, swiss franc, oil, natural gas you would've lost a lot of money in May wouldn't you?
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Are talking about diversification or hedging?

You can hedge a long gold position by selling a gold futures contract = no risk (less cost of carry)

T bonds.. bunds.. etc.. all the same
 
Quote from nitro:

Not only are you not being glib, but it is probably the holy grail of managing large amounts of money and being able to run these sorts of (statistical ) strategies.

Most of the media tell you that (Hedge) funds are overleveraged. When in fact most (smart) Hedge funds are grossly underleveraged. So if a fund is managing say $1B, perhaps they have $500M in the market "speculating" at risk (the VaR), they have the rest in treasury bills, notes or bonds or perhaps other more exotic interest bearing securities. In other words, they rarely if ever use leverage to get alpha.

When the shit hits the fan, they have models that they use (since there is so little data on "crashes" there is also some artistry) to sell a portion of their beta positions into the buying of US securities (flight to quality) to raise cash, and using the money to buy cheap distressed "securities." All it takes is massive patience and a willingness to underperform the most aggressive funds in the short run.

But you never go broke, and you let your alpha strategies do the hard work day in and day out.

nitro
More...

Not only limiting risk, but also pumping up Share ratio. :cool:
 
Most of the misunderstanding...
Stems from the rampant abuse of the term "hedged".

Today...
Any ** unregulated entity **... and 100% of scammers...
Calls themselves a "hedge fund" no matter what they do...
And perhaps 10% of all "hedge funds" are properly hedged/market neutral.

The original question is badly posed in absolutist terms...
Much more real world: "Properly hedged portfolios have very low risk".

Now what is properly hedged?

(1) Simple pairs do NOT have very low risk... too much concentration.

(2) Only a long ** basket ** of at least 20-30 securities (minimum)...
Hedged by a short basket of 20-30 very similar securities can be considered market neutral.

(3) "Very similar securities" are of the same type and class and have a corelation of at least 80-90% to their universe.

(4) In addition, one might hedge against various external risks such as currency fluctuations.

This kind of well hedged, market neutral portfolio is very stable...
For example, my 7 figure portfolio leverage at 2:1...
Has a Sharpe Ratio > 3.00 and a maximum drawdown of 2.5% over the last 4 years.

IMO, if your annual returns are in the 20-30% range...
And you experiencing drawdowns > 5.0% of capital...
Then you hedging is not optimized.
 
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