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Keep Calm and Hedge

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Why Hedge Your Investments

Hedg­ing is an impor­tant and valu­able risk man­age­ment tool for investors to include in their port­fo­lios.

Typ­i­cal­ly, one hedges to reduce the neg­a­tive impacts of mar­ket risk and volatil­i­ty in a port­fo­lio. The hedge is intend­ed to off­set poten­tial loss­es by trans­fer­ring risk in var­i­ous ways (e.g., options, short­ing, or futures con­tracts).

Why Hedge Investments | Keep Calm and Hedge | Swan Insights

Some investors may be wary of hedg­ing because they are unfa­mil­iar with it or because it may seem too com­pli­cat­ed. But it is a com­mon approach to man­ag­ing risk and one that may be quite use­ful when look­ing to tack­le mar­ket risk.


Hedging Is Nothing New

Hedg­ing has been around a long time. Farm­ers, air­lines, banks—they all hedge to man­age the biggest risks in their busi­ness­es. Farm­ers hedge against changes in seed, live­stock and crop prices. Air­lines hedge against big changes in oil prices. Banks hedge against inter­est rate risk.

If you own car or home insur­ance, you are essen­tial­ly hedg­ing against poten­tial prop­er­ty loss either due to a car acci­dent or hous­ing cat­a­stro­phe.

Diver­si­fy­ing your port­fo­lio can some­times appear like a form of hedg­ing. For exam­ple, many investors buy bonds to off­set poten­tial loss­es in stocks with the expec­ta­tion that bonds, and stocks are uncor­re­lat­ed and won’t move in the same direc­tion at the same time. This, how­ev­er, hasn’t always been the case. Remem­ber the 2008 Finan­cial Cri­sis? Many types of bond funds lost val­ue at the same time as near­ly every cat­e­go­ry of stocks.

Accord­ing to Investo­pe­dia, “mar­ket risk…cannot be elim­i­nat­ed through diver­si­fi­ca­tion, though it can be hedged against.” Diver­si­fi­ca­tion alone isn’t enough to man­age mar­ket risk.


Protect Your Assets

As hedg­ing is meant to reduce risk and volatil­i­ty, the goal is to lose less mon­ey in your invest­ments, espe­cial­ly dur­ing times of major mar­ket stress. If your port­fo­lio spends less time recov­er­ing, it may spend more time com­pound­ing.

Some com­mon ways to hedge involve mar­ket tim­ing, short sell­ing, futures con­tracts, and options.

Mar­ket­ing tim­ing and short sell­ing depend on one’s abil­i­ty to suc­cess­ful­ly and repeat­ed­ly “pre­dict the mar­ket.” It is dif­fi­cult to con­sis­tent­ly time when to buy or when to sell across all hold­ings in a port­fo­lio, mak­ing this approach an unde­pend­able risk man­age­ment approach.

Put options, on the oth­er hand, may be a good option for those look­ing to pro­tect their assets from inevitable, but unpre­dictable times of major mar­ket stress.


Keep Calm and Hedge

You know invest­ing can be a bumpy ride. Hedg­ing may be a way to cre­ate a smoother ride.

The key to a hedg­ing strat­e­gy is to take an uncor­re­lat­ed off­set­ting posi­tion rel­a­tive to some asset (stock, etc.).

Put options on an asset are espe­cial­ly effec­tive for hedg­ing since a put option is inverse­ly cor­re­lat­ed to the asset itself. For exam­ple, when you use a put option on a stock, if the stock price goes down, the val­ue of the put option goes up, and vice ver­sa.

We believe that put options are much more effec­tive in man­ag­ing and reduc­ing risk than oth­er forms of hedg­ing. They offer con­trol over the hedg­ing process, are inverse­ly cor­re­lat­ed to the asset they seek to pro­tect, may reduce adverse investor behav­ior, and offer prof­it poten­tial.

Some may shy away from mutu­al funds or oth­er invest­ments that use options due to unfa­mil­iar­i­ty with options or their capa­bil­i­ties. Hedg­ing, how­ev­er, offers a direct way to address mar­ket risk. A hedged equi­ty approach defines and man­ages risk via put options may be ben­e­fi­cial for investors who want to:

  • Remain invest­ed
  • Reduce over­all port­fo­lio risk
  • Seek pro­tec­tion in times of major mar­ket stress

Mar­ket risk is too impor­tant of a threat to be dealt with pas­sive­ly.


Win by Not Losing

Hedg­ing doesn’t have to be only for air­lines and banks. Investors should con­sid­er incor­po­rat­ing a hedged equi­ty strat­e­gy in their port­fo­lios to help man­age and bal­ance the risk from oth­er invest­ments. But how does one vet and select a hedged equi­ty strat­e­gy?

A hedged equi­ty strat­e­gy should have the fol­low­ing attrib­ut­es:

  1. Its main goal is to reduce and man­age mar­ket risk.
  2. It has a trans­par­ent and rules-based strat­e­gy.
  3. The strat­e­gy has weath­ered times of major mar­ket stress.

The goal of our Defined Risk Strat­e­gy, a hedged equi­ty approach, launched in 1997, is to pro­duce con­sis­tent returns through ups and downs of the mar­ket. By tack­ling mar­ket risk head on, the Defined Risk Strat­e­gy seeks to help investors remain always invest­ed for growth, while remain­ing always hedged to reduce loss­es in times of major mar­ket stress.


About the Author:

David Lovell - Director of Marketing - Swan Global InvestmentsDavid Lovell, Direc­tor of Mar­ket­ing, is respon­si­ble for Swan’s mar­ket­ing and engage­ment ini­tia­tives. This includes devel­op­ment and exe­cu­tion of mar­ket­ing pro­grams for Swan’s web­sites, con­tent, com­mu­ni­ca­tions, events, and media. David began his career in the finan­cial indus­try at Mass Mutu­al. David cur­rent­ly holds a Series 65.




Important Notes and Disclosures:

Swan Glob­al Invest­ments, LLC is a SEC reg­is­tered Invest­ment Advi­sor that spe­cial­izes in man­ag­ing mon­ey using the pro­pri­etary Defined Risk Strat­e­gy (“DRS”). SEC reg­is­tra­tion does not denote any spe­cial train­ing or qual­i­fi­ca­tion con­ferred by the SEC. Swan offers and man­ages the DRS for investors includ­ing indi­vid­u­als, insti­tu­tions and oth­er invest­ment advi­sor firms. Any his­tor­i­cal num­bers, awards and recog­ni­tions pre­sent­ed are based on the per­for­mance of a (GIPS®) com­pos­ite, Swan’s DRS Select Com­pos­ite, which includes non-qual­i­fied dis­cre­tionary accounts invest­ed in since incep­tion, July 1997, and are net of fees and expens­es. Swan claims com­pli­ance with the Glob­al Invest­ment Per­for­mance Stan­dards (GIPS®).

All Swan prod­ucts uti­lize the Defined Risk Strat­e­gy (“DRS”), but may vary by asset class, reg­u­la­to­ry offer­ing type, etc. Accord­ing­ly, all Swan DRS prod­uct offer­ings will have dif­fer­ent per­for­mance results due to offer­ing dif­fer­ences and com­par­ing results among the Swan prod­ucts and com­pos­ites may be of lim­it­ed use. All data used here­in; includ­ing the sta­tis­ti­cal infor­ma­tion, ver­i­fi­ca­tion and per­for­mance reports are avail­able upon request. The S&P 500 Index is a mar­ket cap weight­ed index of 500 wide­ly held stocks often used as a proxy for the over­all U.S. equi­ty mar­ket. Index­es are unman­aged and have no fees or expens­es. An invest­ment can­not be made direct­ly in an index. Swan’s invest­ments may con­sist of secu­ri­ties which vary sig­nif­i­cant­ly from those in the bench­mark index­es list­ed above and per­for­mance cal­cu­la­tion meth­ods may not be entire­ly com­pa­ra­ble. Accord­ing­ly, com­par­ing results shown to those of such index­es may be of lim­it­ed use. The adviser’s depen­dence on its DRS process and judg­ments about the attrac­tive­ness, val­ue and poten­tial appre­ci­a­tion of par­tic­u­lar ETFs and options in which the advis­er invests or writes may prove to be incor­rect and may not pro­duce the desired results. There is no guar­an­tee any invest­ment or the DRS will meet its objec­tives. All invest­ments involve the risk of poten­tial invest­ment loss­es as well as the poten­tial for invest­ment gains. Pri­or per­for­mance is not a guar­an­tee of future results and there can be no assur­ance, and investors should not assume, that future per­for­mance will be com­pa­ra­ble to past per­for­mance. All invest­ment strate­gies have the poten­tial for prof­it or loss. Fur­ther infor­ma­tion is avail­able upon request by con­tact­ing the com­pa­ny direct­ly at 970–382-8901 or www.swanglobalinvestments.com287-SGI-071218

By |2018-10-02T10:51:37+00:00July 12th, 2018|Blog|Comments Off on Keep Calm and Hedge