Hedging Equity Portfolio

[EugeP]

Hi my first post here. I have a share portfolio which I wish to hedge using the medium of spreadbetting. I have scoured T2W for detailed posts/articles on how to set up a hedge but can't find anything. I've also scoured Amazon for a book that deals with the mechanics of setting up a hedge to no use. Does anybody here have any thoughts on where I could get detailed information on this as I can already see it's not as simple as setting up a short position to the equivalent value of my portfolio. There are questions here about at what point to activate the hedge, whether to phase the hedge in and at what point to set the stop loss level if at all. Any pointers on articles/books/forums etc. would be very helpful and specifically in a UK context even better..

 

[Jack o'Clubs]

What are you actually trying to hedge against? Market falls, currency risk, particular stock exposure? Any reason why you're not just selling, eg cap gains exposure? Why do you want to use spreadbetting - assuming your portfolio is actual shares? Hedge using CFDs and you could offset losses from the hedge against cap gains. Have you looked at using options?

 

[EugeP]

I have a ftse 100 share portfolio and as we are all aware the market is heading south. I want to neutralize any loss of value in the portfolio through setting up a ftse 100 index hedge via a short spreadbet position. I do not want to crystalize a capital gain and I'm reasonably bullish that the market will still go up in the medium term though obviously I can't be sure and want to use the hedge as insurance against a longer term decline. I have traded CFD's in the past but wondered why you thought this would be more effective than spreadbetting. I have not traded options and would be nervous about using this instrument without having cut my teeth in a smaller way. Hope this clarifies my position.

 

[Jack o'Clubs]

Not sure what the complexity is then - you just need either a general FTSE short or individually short each share in your portfolio for a more exact match to the value of your holdings. The issue seems to be one of you calling market timing, and that is essentially what everyone on this website (and the investment world more generally) is trying to perfect! That sounds a bit fatuous, but there is no easy answer. Personally that's why I'd look at options. If it's a temporary correction it should all be over within a month or so, and if it's more serious than that then it should start to be more evident if things are still heading down in a months time. The key is that you will pay a known premium for a known amount of cover for a finite amount of time. They are complex, but worth reading up on if you want to hedge seriously.

My point about CFDs is simply that it's best to hedge on the same tax basis as your underlying positions. Unlike spreadbets CFDs are taxable. So if you placed your hedge and the market started rising, you could offset the losses from the hedge against the gains in the portfolio. It also means that if the hedge works, you'll pay tax on the gains, but that's offset by the fall in portfolio value. Using spreadbets you wouldn't be symmetrically hedged depending on whether the market went up or down because of the tax issue.

In terms of your questions like: "what point to activate the hedge, whether to phase the hedge in and at what point to set the stop loss level if at all? " those aren't hedging questions, they're market timing questions: you're simply asking how to trade around the market downturn, it's just that you're doing it from the position of neutralising existing exposure rather than opening new shorts. But your questions are exactly those anyone looking to short the current correction would be asking themselves.

 

[EugeP]

Thanks for that...I see exactly what you mean in that the issue is the same whether I am simply shorting the ftse or setting up a hedge. I have in fact already set up the hedge with the position increasing per point as the index heads south. I have treated the 6000 mark as a key resistance point so no great rocket science there. I guess what I need to be very clear about is that the hedge should replicate in reverse my portfolio as closely as possible.

 

[Jack o'Clubs]

Thanks for that...I see exactly what you mean in that the issue is the same whether I am simply shorting the ftse or setting up a hedge. I have in fact already set up the hedge with the position increasing per point as the index heads south. I have treated the 6000 mark as a key resistance point so no great rocket science there. I guess what I need to be very clear about is that the hedge should replicate in reverse my portfolio as closely as possible.

Sounds sensible - good luck.