(Partially) Hedging a Portfolio with Futures or Options to reduce Volatility and to a lesser extent Return

After having gone short futures for a client portfolio recently, I needed to explain what effect such a tactical decision has on the portfolio in question to the clients beneficiaries.

Below is a graphical representation of what happens when you hedge part of a portfolio (in a very specific example, this would need to be calculated for each portfolio that was being considered for a hedge).

Firstly the expected volatility is reduced (in my example hedging 15% of portfolio with SMI put options would move the volatily down by around 1%).

Secondly the expected return is reduced (in my example from 4.9% to 4.8%).

While the exact numbers give a false send of certainty and detail, it does go a long way to quickly and graphically showing what happens when you hedge a portfolio.

Hedging can be very interesting to complement a long term buy and hold portfolio, in my opinion. using-options-or-futures-to-reduce-volatility-while-keeping-expected-return-nearly-unchanged

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