Hedging: Should You or Shouldn’t You?
The primary goal of any hedging program is to minimize the impact a market decline has on the value of an equity portfolio. There are secondary goals, as well, such as reducing portfolio volatility, eliminating negative skew and improving the Sharpe Ratio. As you might expect, these benefits come with costs. The quandary for the investor is determining if the benefits associated with hedging a portfolio outweigh the expected costs.
This paper seeks to evaluate the historical costs and benefits associated with an equity portfolio hedge in order to understand the tradeoffs associated with a typical hedging strategy.