To Hedge Or Not To Hedge

I’m curious as to to how people feel about hedging. After some thought, I decided to put a hedge on my system here on C2.

My final decision was based on the fact that the biggest hits I have taken in the past were always unforeseen black swan type events.

Thoughts? Comments?

Based on today’s price movement, hedging was a pretty smart idea. :100:

Hedging against your system is probably not a great idea, unless you are a skilled market timer. These are discretionary trades. They should be tracked separate from your system returns to see how much, if anything, they cost you. If they don’t cost you much and they smooth out your system returns, then you are adding value. If you consistently lose money on the hedges and they don’t lower the overall risk of your system, then they are costing you money and you should avoid making these trades. Anyway, that’s how I treat any trade I make against my systems.


I mostly agree with your posts but let me explain my thinking. What I am looking for are stocks within the SP600 that significantly outperform the index. That said, the reason for the hedge is protect against something that affects the entire market… Historically the tactic has drastically reduced the draw down while not significantly hurting performance. Time will tell; it always does!

Historically the tactic has drastically reduced the draw down while not significantly hurting performance.

There have been fully hedged strategies on C2 in the past, such that the return on the strategy came purely from adept trading while avoiding correlated market drawdown. Attracted lots of attention for early success, failed in the longer term from a lack of strategic edge (actually, I think it was an overfitted strategy based on extensive - - ie, too many - - company valuation parameters). Regardless of the reason for the failure, there is a significant, definable cost for hedging, period. So there WILL be a “significant” hit on performance, unless it’s a very small hedge meant only to somewhat (as opposed to “drastically”) blunt a drawdown and not avoid it. Good luck with this. Perhaps you’ll be the one with real alpha to outrun the hedge costs.

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I really and I mean really appreciate the input. I will see how things progress and I will be open to make changes. Thank you Babbage_9010.

Hedging can be a prudent strategy to protect against unexpected market movements or black swan events, as you’ve rightly pointed out. By implementing hedges, you’re essentially reducing the potential downside risk to your system or portfolio. It’s a way of safeguarding your investments and managing risk, which is a fundamental principle of sound financial management.

However, it’s essential to strike a balance between hedging and potential returns. While hedging can mitigate losses during adverse market conditions, it can also limit potential gains during favorable market conditions. Therefore, it’s crucial to carefully evaluate the cost of hedging relative to the potential benefits it offers.

Additionally, the effectiveness of hedging strategies can vary depending on the specific market conditions and the instruments used for hedging. It’s essential to thoroughly research and understand the mechanics of the hedge you’re implementing to ensure it aligns with your investment objectives and risk tolerance.

Overall, incorporating hedging into your investment strategy can be a prudent move, especially if you’ve identified significant risks or vulnerabilities in your system. Just be sure to monitor and adjust your hedging strategy as needed to adapt to changing market conditions.

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I have never hedged because I cut losses as soon as possible, move SL to BE and let profits run :cowboy_hat_face:

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I have hedged, cut losses and purchased options. All have their benefits. In the long run, at least in back test simulations, the performance seems to always be better without hedge, stop loss or options. The trade off is huge draw downs. Ideally, one would just accept the risk, believe in their system and let’er rip. Much easier said than done, of course.

Risk Management is Paramount IMO.
Position sizing. Stops and Targets on every trade.
Stick to your system; if you don’t follow your system, you don’t have a system.

I named my system Vesuvius as a constant reminder to watch it carefully lest it blow up. :volcano:
Pull up its Trade Detail. Click on Show Autotrade data. Check the percentages in the per trade Drawdown column. That, to me, is what Risk Management looks like. YMMV.

You’re doing a nice job, @Old_Goat, trading more volatile stocks and leveraged ETFs and managing trades very well to minimize downside. Your return overall tracks the benchmark during this recent uptrend, but with lower volatility and drawdowns. I like the way you’ve handled the past few days very well indeed! Congrats, Vesuvius is one to keep an eye on.

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Today the Nasdaq is getting hit very hard.It is because of things like this that I believe a hedge can be beneficial. The whole idea is to keep draw down low while still having a reasonable upside. What good is a great upside with a huge drawdown?

Thank you for your kind words, @Babbage_9010. As is the case with most good strategies, Vesuvius has evolved over time as the various algorithms underlying its performance have been honed and refined, most recently with the better incorporation of volatility measures into their logic. These improvements, along with sound risk management practices, have proved beneficial in the current negative market environment.

I find it gratifying that Vesuvius’s 13.2% return realized since entry of its first trade on 11/30/23 exceeds the 11.1% figure for the S&P500 over this same period, though it pains me to have seen the strategy’s maximum draw-down recently rise from 3.2% to a still admirable 5.1%. (Figures drawn from C2’s graph below.)

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I think that volatile periods in the market, like now, will always make people at least consider a hedge. In my case it’s a simple case of cost versus benefit. If I am hedging small cap stocks like the strategy I am trading here on C2 with a small cap index, when my stocks are going up the losses on the index trade will be cutting into my gains. Obviously, the goal is to pick stocks that will go up more than the index itself when things are good. There is also the added possibility that the stocks will hold up even better than the index being used in a sell off. Of course, there are no guarantees and the opposite is true as well :upside_down_face:

Perhaps @SeanKelly11, if volatility impacts your strategy negatively, you could limit your hedging to periods of greater volatility. Study your strategy’s returns and behavior, and figure out what drives periods of concerning performance. Hedge accordingly, or adjust your strategy in other ways to improve performance during such periods.

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The goal during volatile times is to stay relatively flat. Maybe slightly up or slightly down.

Rough looking chart.

wow haters gonna hate.