No. of Recommendations: 16
I fear the only hedge that will work if inflation gets sticky, (causing another 2022 type equity sell off, perhaps exacerbated by sovereign debt growing concerns of swimming towards the default vortex, combined with an injection of old fashioned fear, not seen for a while and central banks unable to rescue this time) are long dated out of the money puts on the most speculative equity securities, of which there are many to choose from. Or maybe it’s time to buy the VIX
There is the alternative of simply riding things out. Sure, prices for almost everything will go down for a while, that's the nature of markets. But usually there are some solid and growing businesses whose stock prices come all the way back up after the dip, and indeed all the way back up to their prior trend. If you're invested in those, there is no particular reason to fear the transient low prices: just ignore it and sit on your hands.
In that sense, rather than looking at hedging opportunities, think instead of bear market opportunities. Is there something I own now that I might lighten up on to make sure I have enough dry powder when the next big buying opportunity comes around? When the bear comes, what will I buy, and at what target price?
It's a shame that short selling is so darned hard. I think the main reason is the Karenina effect: all good companies are good in the same ways, but all problematic firms are in trouble in their own particular ways. This makes them fundamentally less predictable. Plus, the math works against you: if you take a dozen small short positions, once the prices move a little bit, you have the biggest bets on the bets that are doing the worst, and vice versa. (being long is the reverse of course). So you eventually have to rebalance the positions, taking losses on the losers and worsening your breakeven on your winners. But worst of all is the near impossibility of picking the moment that the cartoon character, having run off the cliff, will finally decide to look down.
Personally I just bought a bunch of T-bills maturing on Hallowe'en (figuring prices may go down) and put a smaller amount of cash into restarting my quant portfolio after a long hiatus (figuring prices will go up). Hedging my reasoning instead of hedging my security portfolio : )
Jim
