SMCI - Hedging Doesn't Have To Be A Drag: What We Can Learn From A Recent Run Of Extraordinary Returns | Benzinga
Hedging Isn’t The Hard Part
After the Global Financial Crisis, I wanted a simple way to figure out how to hedge, so I worked with a financial engineering post-doc to develop Portfolio Armor’s hedging algorithm. Just input the maximum drawdown you’re willing to risk, and it shows you the least expensive way to hedge that level of risk.
The Hard Part Is Generating Good Returns
That seemed hard at the time, but in hindsight, it was the easy part. The hard part was generating good returns while hedging. You can see that for yourself at the bottom of this page on our website, where we track the returns of our hedged portfolios: the number circled in red is the average 6-month performance of the most aggressive hedged portfolios we track, those hedged against >40% declines, and the number in blue is the average performance of the SPDR S&P 500 Trust (SPY 0.00%↑) over the same time frames.
An Eight-Week Run Of Extraordinary Performance
Take a closer look at the last eight weeks in that table though. Each hedged portfolio (red) hasn’t just beaten SPY (blue), it has trounced it.
What’s Driving That Outperformance
Probably, three different things are at work here:
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Luck (Let’s be honest).
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The power of concentrating in a handful of our top names, rather than diluting with diversification. Each hedged portfolio has no more than eight underlying ...