Hedging your portfolio is one of the best ways to reduce the impact of short-term corrections in a market economy. The markets have continued to work higher, and there’s a general fear among stock market investors who believe that they are likely to lose their current gains soon if the market corrects itself. When hedging, for example, you may hedge a long stock position by buying a put option or establish a collar on that specific stock. The problem, however, emerges when you want to reduce the risks of an entire portfolio and not a single stock position. If your portfolio is diverse, it certainly comprises multiple asset classes with many positions. This will require you to take an extremely costly approach of hedging each of your equity position. So how do you hedge your portfolio with options?
How to hedge your portfolio with options
If you’re considering hedging your entire portfolio, then you may consider doing it using options. To hedge your portfolio with options, you need to look at two things: the effectiveness and cost of hedging.
An effective portfolio hedging happens when the value your portfolio holds is relatively steady even when the asset prices drop. If you’re attempting to hedge an equity portfolio against a market sell-off, we would expect the hedge to appreciate so that it offsets the drop in equity prices.
In terms of the cost of hedging, it goes down to how much you’re willing to pay to hedge your portfolio for a specific period. In most cases, willingness to pay a certain amount is defined by your belief that the market prospects are positive. For example, if you believe that the stock market is likely to fall by 5-10% over the next 6 months, a good hedging strategy will have you hedge at a cost less than 5% of your total portfolio value.
How to hedge your crypto portfolio
Crypto investment can be quite risky because market risks are almost inevitable. Crypto market risks include volatility risks, leverage risks, transactional risks, and regulatory risks. Just like other financial instruments, crypto risks come from the volatile nature of these digital assets. Most of the trading activities involving cryptocurrencies are speculative, hence you must understand the essentials before you get started. To protect yourself from these risks, you need to learn some crypto hedging strategies. Hedging your crypto portfolio will require you to open positions against the market directions to reduce the risks and impacts of market movements.
However, there are ways you can avoid the risks associated with cryptocurrency volatility. One is diversifying your portfolio by putting some of your investment in long-term investment vehicles that protect you from the inherent market risks. One such platform is Helios Fund, which allows you to lock your Bitcoin for 3 years at a return of 9x your investment. The good thing is that Helios Fund ensures you’re protected from the risky market dynamics. The platform manages to achieve this feat by investing in some of the carefully selected investment vehicles.