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Portfolio Hedging on the Cheap in Late 2009

By Eric Roseman

Bulls and bears should both embrace portfolio hedging ahead of the next correction or panic.

Learning how to apply a hedge or a series of hedges can mitigate market risk while protecting portfolios. That's especially true today with stocks in the midst of their greatest rally in more than 100 years.

In late September 2008, I turned my European-based mutual funds and managed accounts from almost market-neutral to net short using reverse-index funds or exchange-traded-funds. For dollar-based accounts, I bought SH, the Pro Shares Short S&P 500 Index, in New York and for EUR-based accounts the Frankfurt-listed DB X-Trackers Short DAX ETF. Both positions surged more than 20% in Q4 when world markets plunged about 22%.

Without employing reverse index ETFs last year my portfolios would have declined much more. Just how badly did I fare? Insurance-related funds declined 7.8% after all fees and managed accounts fell an average 4.8% in 2009. Not bad. This compares to a hefty 38.5% plunge for the S&P 500 Index, -40% for the MSCI World Index and -20% for the CSFB Tremont Hedge Fund Index.

In the absence of organic domestic consumption, the government can't replace consumer spending indefinitely; the global economy is recovering…but $80 oil doesn't help to boost spending in a world still fractured by the loss of credit intermediation, rising unemployment and falling wages.

This is the Mother of all bear market rallies. Hedging your portfolio now is inexpensive and the wisest strategy ahead of 2010.