Hedging during a market downturn?

Question

I've heard of a pair of ETF's that work in reverse when the markets go down (SDS for S&P 500 and QID for NASDAQ). Are these safe invesments to hedge oneself during a market downturn?

My equities are taking a beating, and while I have no intentions of backing out of anything, I am looking for an area to put some money short term - is this a viable alternative or too risky?

Are there other funds out there that operate in this way?

Answer 1

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Delta neutral hedging is definitely the best way to hedge against short term swings while keeping the option open for future profits.

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Answer 2

from a trading standpoint, these vehicles are nearly the same as going short the index.

so, yes ... you can create a partial hedge using them. I say partial because you'll likely have different sensitivities in your portfolio and these vehicles to what is happening in the markets.

probably, you won't know how good your hedge is. Until you have it in place.

And, you can't be complacent if/after setting up your partial hedge. Suppose, as is fairly common in downturns, that your carefully chosen bull strength issues [high growth, strong alpha, strong relative strength, or whatever] also turn down with the market, but start three days later.

If you're not watching closely, you may think your hedge is good after the 2nd day and go to sleep while your position sharply deteriorates.


{My guess would be that you're sitting on some significant capital gains and trying to eek them out until they hit long term status and your tax rate drops significantly.}


GL