I’m a trend trader and trend traders tend to weight their portfolios more heavily in the same direction of the trend. Unfortunately, when trading trends, the portfolio tends to give back unrealized profits during counter trend moves, so to mitigate our drawdown I hedge the portfolio.
For example, say there is a firm called Capital ETF Management, it is near the end of the quarter and the ETF Portfolio Manager deems a correction is imminent. He wants to secure some unrealized gains instead of buying ETF options or liquidating positions.
The money manager calls M1 Consulting LLC (that is my consultancy) and they engage us for additional insight as to how they can reduce risk should a correction occur. Capital ETF Management has a portfolio consisting of the following Exchange Traded Funds a Wisconsin ETF, Copper ETF, Alternate Energy ETF, Wilshire 5000 ETF, China ETF, Precious Metal ETF, Brazil ETF and an Emerging Market ETF.
How would I approach the scenario?
First, I need to determine what security has a near perfect correlation to the portfolio (keep in mind this could be a few different securities depending on the portfolios composition).
After further analysis, we realize the Capital ETF Management portfolio has a near perfect correlation with a Profund’s ETF.
Now I can:
Calculate the estimated volatility of the portfolio
Calculate the estimated volatility of the Profund’s ETF being used as a hedge
Determine when the hedge should be put on
Determine when the hedge should be taken
Note: This should all be calculated and determined before the hedge is put on.
Once I calculate the volatility for the portfolio and the ETF being used a hedge I can determine how many shares must be purchased or sold to put the hedge on.
To learn more about hedging or for more swing trading education visit us at http://etfupdater.com/freeinformation
Mike Matousek, CMT
Portfolio Manager for ETF Updater
http://www.etfupdater.com/
No comments:
Post a Comment