What is Hedge and Hedging Strategies - BlockchainVsCrypto - Get Early Access for Success

Saturday, April 13, 2019

What is Hedge and Hedging Strategies

What is Hedge and Hedging Strategies


hedging an investment is a way of attempting to ensure against a negative event happening. individuals hedge anytime they purchase insurance if an individual purchases car insurance that does not prevent them from ever being in an accident. It simply reduces the negative impact of an accident.
Let's walk through an example of what that means let's say you own a b c fund in your portfolio you want and expect a b c fund to go up but in order to hedge against the potential of a b c fund going down.

You invest in XYZ fund which is negatively correlated with a b c that means when a b c goes up XYZ goes down if you own a stock and you believe the company has great long-term potential but you're concerned about short term potential losses you can buy a put option.

which allows you as the buyer the ability to sell the stock at a set price in the future. let's walk through an example where the use of futures as a hedge would be used let's assume you own a famously successful cake making company. you're very concerned about the rising price of wheat, which you grind to make the flower that you use in your amazing cakes.

you can protect or hedge against this uncertainty by entering into a futures contract which allows you to buy the wheat at a specific price on a future set date if weed prices jump the hedge of the futures contract will pay off because you can buy the wheat at a lower price than the market.

what happens if the price goes down illustrates one of the drawbacks to hedging if the price of wheat drops you are obligated to pay the price in the contract and you would have been better off not hedging at all.

Hedging Strategies

Forex Hedging Strategy
Forex Hedging Strategy

Good, I tell investors now everybody knows stocks are overvalued that the market is high valuations are high. but if you sell now you might miss on the next five years of stocks going up because nobody knows when the market will crash. 

so, if you don't want to sell because we know it's impossible to time the market what you can do is to be hatched to be protected for whatever happens. 

Today I'll discuss seven unconventional hedging strategies that can be applied by everybody that is simple, not complicated and not expensive. 

some hedges are even free so let's meet the first start with discussing hedging for your portfolio.
hedging is of course insurance the purpose of a hedge is that when a value of one asset declines the hedge rises in price so that it covers the loss of the other asset. so, you insure yourself against anything that can happen.

The best hedge is a hedge that makes money creates value as yield and it protects. you're another part of your portfolio that has a yield so you constantly have a yield value and you're protected from whatever happens that's the best hedge there are other edges but let's see in depth seven hedging strategies 


So, the first hedge that everybody can do is diversification. diversification is usually the smart thing to do but you can go beyond and diversify a bit more than what the normal diversification to be diversified.

Normally means only SMP 500 that's no diversification that's being long our stocks and the con good about that is higher interest rates higher stock prices if that turns it will be a terrible investment. 

The next step in diversification is owning for 60% stocks and 40% bonds also correlated and depending on interest rates so what if you want to be diversified in a hedged way, so that whatever happens you make money you have to look at an all-weather portfolio as Ray Dalio is preaching where whatever happens in economy the economy goes up inflation goes up the economy goes down inflation goes up and down whatever all the four scenarios that can happen in an economy you always make money you always have a yield and remember Ray Dalio made a return of ten point eight percent in the last 45 years.

He has beaten the market even if the economic environment was extremely positive for stocks he would have beaten the market in any other situation by a huge margin he pitted by a small margin. now, 

prepared for financial and economic turmoil:

Second hedging strategy that everybody can do is to be prepared for financial and economic turmoil.
we have all seen what has happened in 2009 if you watch the movie the big short you know what was going on and how those who saw that ahead could have prepared themselves at a very very cheap price.

That time feds European Central Bank and Bank of Japan balance sheets as you can see they all increased between four and six times in the last eight years because there was a financial crisis a recession. 

All those bands started printing money I call it money printing the formal name is quantitative easing that includes lowering interest rates increasing credit offering tax credits and buying assets on financial markets.

For me it's simply money printing they insert liquidity into the system now what will happen in the next recession central banks and politicians will use the same medicine they will clean, even more money with the recession come in the next 5-10 years definitely because the economy works in cycles that have been the case for the last three thousand years.

I have gold from April 2001 it went up about five times so this is similar to what has been going on with the increased central bank balance sheets. 

The correlation isn't perfect but the trend is there gold prices are very much influenced by sentiment and gold price has started going on up in expectations of what will happen so in the short term don't expect perfect correlation but in the long term expect that gold prices will follow the amount of money in the system.

As there will be more money in the system gold prices will go up so that's a hedge especially if you take it from a long-term perspective and don't care about one hundred two hundred dollar moves.

I prefer gold miners as a hedge and you can check more about gold in my gold will go to twenty thousand. 

Everybody was surprised that the huge monetary easing policies didn't trigger huge inflation hyperinflation however hyperinflation can happen any time has happened in the past many times. can easily slip out of control so if we see inflation you want to be protected against inflation stocks are good proxy protection for inflation because they can raise prices.

we have seen very low inflation but every Central Bank has a target of two to four percent inflation and they will reach it eventually so 4% inflation 5% inflation will make a huge impact on most portfolios.

You want to be prepared for how to hedge yourself for inflation take a loan with a fixed interest rate also. if the inflation rate surpasses that interest rate you're helped because your payment's become fixed your income is increasing at the rate of inflation.

It becomes cheaper and cheaper so think about the loan as a hedge against inflation other inflation hedges are of course go that I already mentioned real estate and tips treasurer inflated protection securities but as I don't like bonds and the yield is very low you have to see how that fits your portfolio for hedging for currency risk currencies move in predictable ways if you look at from a longer-term perspective at some point you will hear discussions the dollar is too strong.

It's not good for our exporters it's not good for our economy and after a few years that balances itself out the dollar becomes weak and then it's good for exporters and let's say Europe becomes strong or some other currency and then after a few years again.

It balances itself out if we take a look at this chart from 1995 the dollar index went down till the 1995 then went up then again down and now it's again up so we can say that the dollar is strong now so take advantage of the strong dollar to diversify across the world when the dollar is weak again rebalance those currencies and buy again of your domestic currencies in such a way by looking at what's going on where in the world you can really add a few percentage points to your returns and lower your risk because you are diversified and hedged against currency risks with well-diversified international portfolio.

The good thing is that global interest rates are even higher than the US dollar now so you can really find some bargains around the world number 5 is liquidity having cash as hedge cash is the power it gives you the opportunity to buy bargains when the market offers bargains and here.

There the market always offers bargains the best way I prefer to level the valuations are at this level and let's say they are high I want to have 25 percent in cash if valuations drop to 20 15 10 or seven when valuations are at seven you want to be invested totally.

however and then if valuations rise you rebalance again you will underperform perhaps the market in the short-medium term but in the long term, you will outperform the market will lower risk so always keep a cash hedge because cash is power however power often gets to people's heads so be careful and be disciplined.

see if you can have a cash hedge number six hedging outside of financial markets we are all focused mostly on our portfolio what can we do what stock to buy was this what's the best stock or something however investing is not just about the stock market investing is a broad portfolio that effects and has implications for your whole financial life bid real estate. 

your job your business your work your whatever and you have to put all those factors into your risk-reward investment scenarios. so, if you only have stocks why don't you think about investing perhaps.

In the long term, you create a very hedged portfolio and if a crash comes you don't care and that's what good investors do everybody else will be ameliorated in a crash and then leave investing all together if you're hedged a crash comes.

I don't care if this comes I don't care I don't care you are protected in any kind of environment so really think about being hedged with what you're doing one of the seven strategies all of the seven strategies an all-weather portfolio I don't know what's best for you so we'll keep discussing hedges interesting investment opportunities .

Extreme hedges extremely cheap with huge rewards that are not only hedges but also investments the best hedge for me is let's say gold miner or different miner that protects me against a lot of things and gives me already a yield now so that's the free hedge if you invest in a hedge that's creating value that's for me a free hedge because it's adding value to your portfolio.

If you have those hedges over the long term you will have huge yields and you will sleep well over time it's very important to rebalance those hedges as one increases lowers in prices becomes overpriced or underpriced and then in comparison to what's going on in your portfolio for new rebalance that you can expect constant returns over time expect some volatility take advantage of the long term volatility end of the myopic market and your returns will be very very sound and bulletproof 

Thank you for Reading. For more interesting investment strategies looking forward to your comments and

I'll see you in the next Article

1 comment:

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