Good Reminder of Why We Hedge!

By Derek Moore

Source: Yahoo Finance Year to Date S&P 500 Index Chart

After several sanguine weeks in equity markets, Monday marked a good reminder of why we hedge in many of our core portfolios. The S&P 500 Index opened down lower from Friday’s close and reached intraday negative -3%+ percent before firming into the close.

As the market made new highs over the past months it is typically for that investors might start to feel complacent and question the value of tactically hedging portfolios. Today proved a reminder that markets can move quickly.

At ZEGA we often point out that part of the reason for hedging is to limit downside, to create opportunities to buy more shares lower, but also to help investors sleep a little better at night. This is especially true for clients towards the latter part of their working years or into retirement. The reason being is that large drawdowns become problematic with less time (or no time) to recover.

Another big reason to be hedged is that it takes away the pressure to be right on timing when considering moving money into markets. We know that many times advisors have clients that might have come into a lump sum of money. Whether it be the sale of another asset, an inheritance, or other windfall. Trying to time the market can be a losing battle but if you have downside protection it lessens the pressure to be right on timing.

So, while we never want to see clients or advisors experience unrealized losses on a given day, keep in mind today was a good reminder of the value of hedging your investments. While some might question the need to hedge after the last decade, value can be created for your clients in having a systematic strategy to put a floor in their portfolios.

Better yet, on days like this to just say “I’m glad I’m hedged”.