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Hedging Requires an Uncorrelated Asset

|Includes: GLD, PowerShares DB USD Bull ETF (UUP)
Outside of cash dividends, are equities really equities any more? Some may want to wash my mouth out with soap for saying it but equities are trading like and with commodities at what seems like 99 & 44/100 % of the time. Or maybe equities are trading more as if they are the derivative?
 
Do I buy Apple (NASDAQ:AAPL) because it has the hottest product on the planet and a huge recurring revenue stream with iTunes or because it’s a significant percentage of the SP100? All this poses some questions:
 
  1. Does the commodity like volatility in equities make stocks significantly riskier than portfolio managers have modeled?

     
  2. With the equities - dollar trading correlation so high, along with high correlation to gold, other metals and oil, what instruments are available to diversify a portfolio?  (Possibly commercial real estate if you can find a way to short it and retain reasonable liquidity.)

     
  3. Can we say without hesitation that the ETFs and futures tail are wagging the equity dog most of the time?

     
  4. Can a pure short position ever really make sense? Even should sound analysis identify a likely poor performer in the SP500, it may be dragged higher by the all one market, commodity like, derivatives driven nature of movement in the equities market.  (The old saw about the markets ability to remain irrational longer than one individual can remain solvent comes to mind.)
     
Private wealth managers are facing an extraordinarily difficult situation. Traditional theories and tools may not be working. This may explain in part high levels of cash still being held despite a strong and nearly uninterrupted advance in the equities market since March of this year. Cash is the only way to diversify and even that strategy has significant complications; low returns and risk of inflation to name two.


Disclosure: long GDX,