fingham

When Hedges Fail

An offsetting hedge, even if it's expensive and imperfect, is still your best alternative if you're stuck holding a huge stinky diaper bag of CDOs. For the rest of us, it generally makes sense to manage risk by diversifying. If you believe, for example, that US stocks are too high, don't start trying to do a bunch of offsetting short trades - just move long stock money to the sidelines or into other asset classes. Diversification is still the only free lunch out there. Hedges are not free, and they often don't "work" as planned.