How about combining a trending following and counter trending strategies at the same time.. With independent target profits, you will find your self hedging safely. Am i right? Does any do this? If so, please share. Thanks McGene
My strategies with a trending component have a correlation to the market of about 75%. My counter trend are more like 25% to the market and to those with the trending component, so there is still some significant market risk. My short strategies have very low to negative correlation and that significantly reduces downside volatility.
This is one of the more common reasons to hedge - extract alpha and reduce volatility. In any case this is why we do it. IF the strategy has enough alpha this will reduce market risk and result in higher sharpe ratios. You can always add risk by leveraging, so if the strategy is any good you could end up with higher returns with same risk. /Hugin
imo, hedging is all about risks. In investment and trading, there are 3 major risks above others. I think the risk of money price ( interest and exchange rates) should be relatively small for most traders doing short term trades. The risk of commodity price would be most important for directional traders. This kind of hedging costs profits and consequently reduces rerturns. Personally I have proper hedging all the time. I know it's very expensive indeed. Systemic risk affects your assets portfolio when black swan appears once in many years. To hedge or not to hedge as well as how to hedge should be really an issue that might be better delegated to specialists. Theoretically, perhaps the aim of hedge funds is for hedging systemic risk.