Hedging comes in all shapes and forms. We hedged our current position 2 days ago by utilizing a 10% position in the ProFunds Ultra Short OTC fund. A 2 beta inverse fund. As we currently manage ERISA accounts in our portfolios – standard short positions are not allowed. Going into this weeks earnings and owning EBAY, SYMC, GRMN, VIP and one biotech stock, we felt for the first time the need to hedge. Theoretically the ProFund Ultra Short will provide a 200% gain on any losses occurring in the Nasdaq 100. . Even with the rebalancing, we feel the Nasdaq 100 has sufficient weighting in Tech to help offset positions

Yesterday the fund was up 3.89% and will be up some today (1/16/2003). We were lucky to get such good performance from SYMC today. A hedgers dream; make money on the hedge and on the underlying portfolio. Happens too infrequently to be giddy.

We were not looking for a dollar for dollar offset, just a way to protect some profits if weakness occurs. Those of you that follow tradingmarkets.com know many of the traders were looking for a period of weakness to occur starting two days ago. We will lift our hedge when we believe the market has stabilized, this of course is a “gut” call.

Prosperous investing to all.

Ed Gjertsen II

ed@macktracks.com

-----Original Message-----
From: Gene Ricci [mailto:genr@swbell.net]
Sent: Thursday, January 16, 2003 4:27 PM
To: My Friends
Subject: Can We Make Money Hedging ???? - Maybe So.... Come to the next VectorVest Meeting - January 25th and see

Yes, we're going to discuss how to use VectorVest to 'hedge' at the next meeting, January 25th.

Please do some advance reading so that the session will be more meaningful for you.....

Hedge

Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of a protecting position in a related security.

If you owned a stock, then short selling an equal amount would be a hedge.

This strategy is used when you are unsure what the market will do. A perfect hedge reduces your risk to nothing (except for the cost of the hedge).

Hedge Fund

An aggressively managed portfolio taking positions on safe and speculative opportunities. Most hedge funds are limited to a maximum of 100 investors. For the most part hedge funds are unregulated because it is assumed the people investing in these are very sophisticated and wealthy.

Don't be fooled by the name, true hedging refers to reducing risk, but many hedge funds use options, short selling and any other strategy to increase leverage and get a maximum rate of return.

On the other hand, because many hedge funds use futures, swaps, and arbitrage strategies you could argue that they diversify away some of the investor risk from the stock market.

Long/Short Equity

A hedge fund strategy that involves buying certain stocks long and selling others short. There usually isn't a restriction on the country that the stocks trade in either.

This type of hedge fund basically has free reign to buy or sell what it likes. A long/short equity hedge fund is usually considered to be higher risk.

Equity Market Neutral

A hedge fund strategy that seeks to exploit differences in stock prices by being long and short in stocks within the same sector, industry, market capitalization, country, etc. This strategy creates a hedge against market factors.

It's the ultimate strategy for stock pickers because stock picking is all that counts. For example, a hedge fund manager will go long in the 10 biotech stocks that should outperform and short the 10 biotech stocks that will underperform. Therefore what the actual market does won't matter (much) because the gain/loss is offset by the other. If the sector moves in one direction or the other, the gain on the long stock is offset by a loss on the short.

Market-Neutral Equity Style Investment (example)

The main objective of market-neutral style of investment is to minimize market and sector risk by buying stocks, which are expected to outperform the market, and selling stocks short, which are expected to under perform the market. This style offers the chance to make positive investment returns in a down market as well as in up market. Theoretically, when long and short positions are equally weighted and securities are paired for each sector then the market-neutral style should render the portfolio insensitive to market risk. Pairing of stocks is done to match long and short position for each sector separately to cancel out risk associated with each position. Goal of market-neutral investment style is to keep market exposure as little as possible. Market exposure of a portfolio can be measured by the following formula:

Market exposure = Long exposure – Short exposure
Capital

In practice there are always some uncovered risks, mainly stock selection risk, trade execution risk and market risk of unhedged positions. In addition, hedge positions may not completely eliminate market or sector risk. Therefore, active management is required to adjust positions regularly and keep portfolio in line with acceptable market exposure. Our attempt will not be to eliminate market risk but to minimize it by keeping low value of market exposure.

Selection of stocks will be based on anticipated price performance relative to the other stocks of same sector that is selecting leaders and laggards. Portfolio will buy stocks of leaders, which are anticipated to beat the market and sell short stocks of laggards, which are expected to lag behind.

To effectively implement investment style, the main focus will be on mid and large-cap stocks of large float and high trading volume. Up to 10 percent of the portfolio may consider opportunities in small-cap stocks.

When a sector is in up trend, portfolio holdings will be bias towards long positions. Consequently, in the downtrend, portfolio holdings will be bias towards short positions. Timing of initiating long and short position may vary based on sector trend line. Therefore, at times there may not be any hedge for a particular position in portfolio.

Portfolio may sell covered options on any long or short position when total annualized return (option premium plus profit in stock, if Called or Put) results in at least 30 percent or better.
All short positions in stocks, if not hedged, will carry a STOP Loss GTC order at all times. Initial STOP Loss order will be placed between 5 to 15 percent loss level based on stock volatility and technical indicators.

Links to other articles on hedging:

http://invest-faq.com/articles/strat-hedging.html

Hedge Ratio
http://www.investopedia.com/terms/h/hedgeratio.asp

Basic Risk
http://www.investopedia.com/terms/b/basisrisk.asp

Portfolio Insurance
http://www.investopedia.com/terms/p/portfolioinsurance.asp