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| Using Futures to Hedge your Portfolio (How one Texas based fund used a study of stock index futures to increase performance with less risk.) By using futures an investor can remove all or part of the market risk from his portfolio. This is usually done when an investor has achieved a satisfactory return on his portfolio and he wants to “lock” gains, protecting them from unfavorable movements. They can also be used to hedge away all market risk and what the investor is left with is the out performance of the market due to his stock picking ability. The number of contacts to be traded is determined by running regressions on the portfolio’s returns and the returns of different market indices. Usually, weekly returns are the best time period to use but in this case we used daily returns because of lack of information on the portfolio’s returns. We ran regressions based on the returns of the fund from June 2002 up to August 2002 to find the number of contracts to buy or sell. We then tested how the hedged portfolio would perform compared with the unhedged, actual returns of the portfolio. In Table 1, the regression on the Nasdaq indicated that we should sell 8 mini contracts on the NDX. The results are amazing in just one month of using futures. The portfolio lost $51,000 compared with $24,000 that it would lose if we hedged with E-Mini’s. In table 2 we ran regressions on our returns and both the Nasdaq and S&P500 futures returns. The regression indicated that we should sell 3 Nasdaq mini contracts and 4 S&P500 contracts to hedge away the market risk. The results are again impressive, with only half the losses. (Portfolio used is a Long/Short US Equity fund) Past results are not indicative of future results. There is a risk of loss involved in trading futures. |
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