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At 8:04 AM -0600 8/11/02, cwest wrote:
>You mentioned that you're using deep puts to hedge a fund. I'm always
>curious which approach people use to construct such hedges and what's been
>their experience with tracking errors. My preferred strategy is to use a
>qualified relative beta of their respective volatilities where the
>qualification is the exhibit of an historical low tracking.
The attached picture shows the effect of a simple hedge using the
ProFunds UltraBear fund, which matches the SPX with a beta of -2. (If
SPX goes down 1% then this fund goes up 2%.)
The hedge was applied where the two curves cross. Prior to that date,
portfolio was the black curve. After that date the portfolio was the
red curve.
Note that the tracking prior to the crossover showed good tracking
but that the tracking got worse after that, during the recent sharp
selloff. I traced this behavior to one of the funds doing some kind
of hedging internally, which caused the account value to spike up
temporarily.
You can get much better tracking by selling short various
combinations of exchange traded funds.
I usually just design the hedge for the lowest standard deviation of
returns in backtesting up to the date the hedge is applied.
Bob Fulks
Attachment:
Description: "Hedged4.gif"
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