3 ms·

Well, just hedge all your positions, every year. It's actually really simple, if you buy a share of AAPL lets say, and it cost you ~$300 (pre-COVID), decide how

Well, just hedge all your positions, every year. It's actually really simple, if you buy a share of AAPL lets say, and it cost you ~$300 (pre-COVID), decide how much you want to spend on the hedge (let's say 1/3rd, so $100), and buy a LEAP (option that is >=1 year out) put. Options are riskier than stock, so they tend to pay out much higher. With such an unexpected drop in march, you could have bought a LOT of very very cheap (let's say $1/contract to make the numbers simple) put options for like AAPL $250 let's say. Those options are cheap because they generally never hit, and even in early the market had not priced in the possibility of coronavirus being a global problem of this scale. If that contract is worth $10 later (which is still a very cheap option), you've made 1,000% return. > A tail-risk hedge fund advised by Nassim Taleb, author of “The Black Swan,” returned 3,612% in March, paying off massively for clients who invested in it as protection against a plunge in stock prices. All institutions hedge, it's just a matter of how much they hedge -- there are also some institutions that are intentionally "long volatility" (which means they expect volatility to increase). One way you could do this is to buy shares of a speculative instrument like $TVIX which is 2x fund of a thing called $VIX (the "Volatility Index"), you're going to lose money/maintain holdings (there's a thing called roll risk and other risks to consider just holding these instruments), but in a month like march when $VIX goes from ~$10 to ~$80, you're going to have a ~800% return.

mcnamaratw 7y ago
It's simple. But it's expensive and it's not necessarily foolproof in a serious crash.
- hardwaresofton 7y ago
  Agreed -- I did not mean to imply that it wasn't expensive -- but what you do is bake this into the positions. Entering a position without a hedge is dangerous, though of course equities are much less likely to have drastic drops (depending on the company). Hedging is still a good idea for the usual investor -- but obviously don't take losses on puts for years trying to time a downturn. One thing I didn't note is the difficulty in timing -- if you held your puts too long, they would have gone back to zero with the insane rally we saw last month, for many reasons.
valuearb 7y ago
AAPL is within 10% of it’s all time high, why pay massive annual hedging costs when it bounced back so quickly?
- hardwaresofton 7y ago
  Super late, but AAPL arguably shouldn't be within 10% of it's all time high. Arguably it is at the current price because of unprecedented swift and decisive action on the part of the federal reserve and congress. The Federal Reserve slashed the federal funds rate to near zero and starting "unlimited QE". Neither of those actions amount to buying equities directly, but them taking such an active part in the corporate bond market (they now have the ability to purchase investment grade bonds, though they hinted in a recent meeting that they didn't actually purchase any) has done enough to spur companies into raising cash. Congress's CARES act and other bills actually lend 4.5B (500B leveraged up ~10x) to corporations with little oversight. On top of all of this AAPL actually has a ton of cash on hand, so they are arguably a better buy than other companies. Arguably the downturn in march was panic selling and/or selling to cover margin requirements, but with the uncertainty on how the virus would affect various industries and for how long, de-risking is worthwhile. Also, no need to spend massively on hedging -- hedge according to your risk appetite.
  - valuearb 7y ago
    If you don’t need to sell anything from your portfolio in the next 5-10 years, why hedge? The vast majority of investors should be focused on the long term, so hedging is just a cost that reduces their returns.
    - hardwaresofton 7y ago
      At the beginning of the period yeah it may not be necessary to hedge, but as the fund allocation shifts it's probably a good idea. I have a sneaking suspicion that even if every single investor was long-term focused, the staggering of the starting and restarting of various funds would make the action look sinusoidal.

mcnamaratw 7y ago

It's simple. But it's expensive and it's not necessarily foolproof in a serious crash.

hardwaresofton 7y ago
Agreed -- I did not mean to imply that it wasn't expensive -- but what you do is bake this into the positions. Entering a position without a hedge is dangerous, though of course equities are much less likely to have drastic drops (depending on the company). Hedging is still a good idea for the usual investor -- but obviously don't take losses on puts for years trying to time a downturn. One thing I didn't note is the difficulty in timing -- if you held your puts too long, they would have gone back to zero with the insane rally we saw last month, for many reasons.

valuearb 7y ago

AAPL is within 10% of it’s all time high, why pay massive annual hedging costs when it bounced back so quickly?

hardwaresofton 7y ago
Super late, but AAPL arguably shouldn't be within 10% of it's all time high. Arguably it is at the current price because of unprecedented swift and decisive action on the part of the federal reserve and congress. The Federal Reserve slashed the federal funds rate to near zero and starting "unlimited QE". Neither of those actions amount to buying equities directly, but them taking such an active part in the corporate bond market (they now have the ability to purchase investment grade bonds, though they hinted in a recent meeting that they didn't actually purchase any) has done enough to spur companies into raising cash. Congress's CARES act and other bills actually lend 4.5B (500B leveraged up ~10x) to corporations with little oversight. On top of all of this AAPL actually has a ton of cash on hand, so they are arguably a better buy than other companies. Arguably the downturn in march was panic selling and/or selling to cover margin requirements, but with the uncertainty on how the virus would affect various industries and for how long, de-risking is worthwhile. Also, no need to spend massively on hedging -- hedge according to your risk appetite.
- valuearb 7y ago
  If you don’t need to sell anything from your portfolio in the next 5-10 years, why hedge? The vast majority of investors should be focused on the long term, so hedging is just a cost that reduces their returns.
  - hardwaresofton 7y ago
    At the beginning of the period yeah it may not be necessary to hedge, but as the fund allocation shifts it's probably a good idea. I have a sneaking suspicion that even if every single investor was long-term focused, the staggering of the starting and restarting of various funds would make the action look sinusoidal.