Hedging: Reader Q & A

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Several readers have already implemented some sort of hedging strategy to protect themselves from sudden market downturns against existing holdings.

One mistake I noticed has been what I refer to in my e-book as hedging apples with oranges.

Just because you are holding certain securities in your portfolio does not mean they are suitable for hedging. The best way to succeed is to make your fund selections with the purpose of hedging in mind and then pull the trigger when the Hedge TTI gives the go ahead.

Along these lines, one reader had this question:

When we implement the hedging strategy, do we need to pick up mutual funds which show positive returns in the last 3 months or 6 months or what?

Will appreciate your guidance.

Since the Hedge TTI is based on a short-term trend (10-week moving average), there is a good chance that only a few domestic funds and ETFs are showing any positive momentum figures at the time a Hedge buy signal is generated. Take a look at the domestic ETF tables and mutual fund tables of 12/25/08, just days before I initiated the Hedge.

You will also notice that M-Index rankings are still in negative territory. It is far more important that you select your funds/ETFs based on the Beta as outlined in the book. That should be your main criteria. If by chance your selected funds/ETFs are also showing positive momentum numbers, consider that simply a bonus.

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Comments 4

  1. Ulli, on checking for suitable funds to use for hedging, I prefer to use ETF’s but almost all of the top funds are not diversified. Can I use an emerging market fund VWO or QQQQ,or a small cap fund like MNSMX if it is only rated 1 M-Index? Or must it be correlated to S+P 500?

    Vera

  3. correlated means R-squared =100
    Several large caps with Beta over 1 have lower correlations just as the mid caps do. Not clear how you select the correct ETF or fund. And which ETF are diversified and correlated to S+P 500?

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