Sunday Night Hedging

Man Institute wrote about how to prepare for an equity drawdown. The hedge combo they decided on, paired with 75% in equities, was to equalweight the hedge sleeve with "quality" long short, gold/silver, the ten year US treasury and long Swiss franc-short Aussie dollar currency pair. 

Many years ago we looked at long Aussie-short Swiss franc as a proxy for speculation so it is interesting that Man spun it around to function as a hedge. Here's the last five years showing how the franc has done against the Aussie.

Some of those moves are huge for currencies but obviously they are both much smaller than USD, EUR or JPY.

Here's how I built the Man Institute hedge;

Then I added that hedge in with 75% SPY along with two other hedged sleeves and then compared that to just 100% SPY.

A reminder of what is in the United States Sovereign Wealth Fund ETF which is just something I made up a few weeks ago plus 75% in SPY.

It is interesting how close the three hedged portfolios are CAGR-wise but there is a little differentiation with volatility. In 2022, SPY plus Man Hedge was down 12.94%, SPY plus US Sovereign Wealth Fund was down 13.86%, SPY plus managed futures/global macro/BTAL was only down 6.14% while SPY was down just over 18%. This year, going in the same order the portfolios are down 5.66%, 6.51% and 7.16% respectively versus a decline of 10.22% for SPY. 

Maybe the conclusion then is that the decision to hedge in the first place is more important than how you hedge. Sort of. I think there are plenty of bad ways to hedge. Obviously I am a big believer in devoting time to not only figuring out how to reduce portfolio volatility, one goal of hedging, but also how to improve the process as each event comes and goes. 

Speaking of which, as I hit the send button on this one, the S&P futures appear to be green. If I have the headlines correct, the tariff exemption was taken back or maybe denied by Trump? So I am surprised that the initial reaction is up which reiterates an important point which is that markets regularly go up when they shouldn't. Who knows if the initial reaction will carry over tomorrow or not but this is why I think it is better to hedge instead of doing a lot of selling for the times that it does go up when it shouldn't

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