Hedging strategies

student882

Hello everyone! This is my very first post here!

I am first year studying portfolio management in an university. We have an end term homework on financial derivates with some questions to answer. Although I answered on most of them I still have two questions that I can't find information for. I'll be greatful if the community here helps me out.

1. What is the most basic hedging strategy to insure the profit of a mutual fund? Why?
2. During the financial crisis of 2008, in the first month after the market collapse, most of the investment funds' hedging strategies held up and the investors remained calm but in the next month even those strategies crashed. Why did this happen?

I would like to thank you for your help in advance!

ColdIron

Found the same question here, in my day we were supposed to research the questions ourselves rather than copy other people's answers

student882

You are absolutely right! But I am just feeling despered! You have no idea how many websites and pages I have reviewed.. I just can't make this on my own! That's why I ask for help anywhere I can.. I am sorry that I posted my question on yahoo answers but I hope you can understand me. To be fare I just deleted the question from yahoo! Please help!

James_B.

student882 wrote: »

You are absolutely right! But I am just feeling despered! You have no idea how many websites and pages I have reviewed..

Oh come on, really!

Look beyond the web, maybe buy a book, or go to the library. Better still, just think for yourself; what hedge can you execute against the performance of a portfolio that holds X, Y and Z?

Voyager2002

What sources are your friends on the course using?

What does it say in your lecture notes about the issue?

What did your tutor tell you to look at?

IronWolf

I'll give you a hint, what kind of financial security can you buy that guarantees your current profits, but also allows you to benefit from price rises in the future?

Glen_Clark

student882 wrote: »

What is the most basic hedging strategy to insure the profit of a mutual fund?

1) Do like the professionals and gamble with other people's money so you can't lose your own.;)
2) Make sure the odds are in your favour like the bookies do, so whichever horse wins they will be in profit

student882

IronWolf wrote: »

I'll give you a hint, what kind of financial security can you buy that guarantees your current profits, but also allows you to benefit from price rises in the future?

Because this is a contract fund managing many instrumets it is dificult to choose a pair of shares to buy/sell CFDs on. So I think that the most probable way of hedging a mutual fund is by using Hedge-Index Diversification and buy several CFDs over diferent market indeces which the fund contains shares from. This way even some of the shares' prices start to drop the chance of the overall index to go up is much probable.

This is all my speculation and I am not sure it will be right! That's why I asked for help!

student882

Actualy to some degree my specullations answer my second question. In 2008 during the first month of the market collapse everybody was expecting prices of the shares going down and overall the market idecies too. So everyone started selling index CFDs to hedge against the loss. The next month though there wasn't anyone to buy these CFDs so the hedging strategies went down too. As I said all of this are my speculations and I am not sure they are correct. That's why I ask for help!!!

IronWolf

student882 wrote: »

Because this is a contract fund managing many instrumets it is dificult to choose a pair of shares to buy/sell CFDs on. So I think that the most probable way of hedging a mutual fund is by using Hedge-Index Diversification and buy several CFDs over diferent market indeces which the fund contains shares from. This way even some of the shares' prices start to drop the chance of the overall index to go up is much probable.

This is all my speculation and I am not sure it will be right! That's why I asked for help!

You don't need to get into CFDs of finding pairs of shares, there is a simple thing you can buy as insurance for a single share.

Price is determined by a couple of Nobel prize winners...

IronWolf

student882 wrote: »

Actualy to some degree my specullations answer my second question. In 2008 during the first month of the market collapse everybody was expecting prices of the shares going down and overall the market idecies too. So everyone started selling index CFDs to hedge against the loss. The next month though there wasn't anyone to buy these CFDs so the hedging strategies went down too. As I said all of this are my speculations and I am not sure they are correct. That's why I ask for help!!!

The big problem in 2008 was that if you had bought CFDs say from say Bear Stearns as a hedge, after some market turmoil you are suddenly in the money and want Bear to payout, except they are basically insolvent...

Not just you but Goldman Sachs have thousands of these contracts with Bear Stearns, so are they even solvent? In fact, who is solvent when everyone owes everyone else more money than is even in existence!

Derivatives are basically insurance but without the underwriting discipline or the laws protecting insurance purchasers from companies not reserving enough money to cover payouts.