Hedging

[millionairemind]

Thanks W.

You always say I ask the difficult questions.

But you always give the good answers.

[millionairemind]

Hedging thro' the SP500 futures as well as program trading were the main causes for the 87 crash.

Wow, MM's memory is so long and good

I read it from books. Financial crisis is interesting. Especially the recent one that we just had.

I was still in Secondary school in 1987, worrying about the pimple on my face..

But I remembered that one of my millionaire uncle lost a landed property in Bukit Timah during that crash.

[kennynah]

And after sleeping over this problem, my conclusion is to keep things simple:-

1) Try to get the Asset Allocation correct in the first place
2) Take calculated bets but manage your risks accordingly
3) Hedging like Diversification, is not a very good tool for Managing Risk

i can attune to your latest thoughts...

[winston]

1) program trading were the main causes for the 87 crash.
2) But I remembered that one of my millionaire uncle lost a landed property in Bukit Timah during that crash.

Yes, program trading was the culprit. I think everyone had a Stop Loss and were trying to get out at market price ..

It was a 25% drop on the Dow in a single day.

In Asia, people were also panicking. I recall trying to buy on the dip but my broker refused to take my order. He told me that the foreign funds were pulling out and it's better to wait...

[winston]

TOL:-


I always have problem putting together a good hedging program...

Example:

If one has exposure to Equities, then one can buy some puts to hedge, in case there's a sudden downdraft, as in the case this weekend. Who would have guess that this Tunisia / Egypt thing, would spread throughout the world ?


However, if I'm bearish, I prefer to have no exposure to Equities, rather than to have some exposure and then try to hedge away some of the risks with some puts. But it's easier said than done because my speculations are mostly "special situations".

And it's never a direct correlation as one can be caught in a situation where the puts are dropping but your equities are also not going up.

Maybe my problem is that I have too many positions and is therefore not nimble enough to react.

I recalled reading somewhere that one should have at most only 4 positions at one time, so that one can be nimble to react to any situation...