Investors have an increasingly vast number of investment choices to choose from. From bonds to annuities, GICs, and stocks with an endless array of industries and sectors to look at, investors are constantly searching for the highest possible yield with the lowest amount of risk.
The high-yield/low-risk calculation often involves some measure of hedging (either directly or indirectly) for large positions in a given portfolio. The reality is, however, that the variety and scope of the hedging opportunities available to an investor are seemingly as vast as the available investment opportunities themselves, making choosing hedges almost as difficult as choosing the investment vehicle itself.
Assuming an investor wants some sort of downside protection (which isn’t always true, as many investors during this most recent bull market who did not hedge can boast the highest returns), the investor must decide whether a "blanket" or market hedge is what they want, or if an industry-specific or company-specific hedge is more appropriate.
For portfolios consisting largely of ETFs or other market-based funds, the cheapest and easiest way to buy portfolio insurance would be to purchase index hedges for the indices one is invested in. For a portfolio concentrated heavily in one industry, portfolio diversification can act as a hedge, as can sector hedges.
For portfolios with 50% or more of the portfolio invested in a handful of stocks or less, buying put options or going short a competitor’s stock can be the way to go.
As with any investment decision, it is important to consider all options and discuss the available strategies with a financial advisor.
