We live in an ever-changing world. As an investor, it is important to be prepared for anything. No matter your risk tolerance, time to spare, or available capital, there is an investment strategy that’s right for you. Keep reading to learn more about different investment strategies, including hedged approaches, short-selling, options-based investing, and the 130–30 strategy.
A hedged approach is designed to manage investment risk. This is accomplished by taking two positions on a given investment. The first position is the investment itself, and the second is an opposing position in a related asset. Hedging combats losses in exchange for promising a less astronomical return than more risky-heavy positions could attain.
Some examples of hedging are purchasing insurance that protects against property losses and utilizing derivatives to counteract losses in underlying investment assets. Typically, the derivatives involved in hedging include options and futures.
Short Selling Strategies
Short selling is a strategy that can be used on its own or as a hedge against the downside risk of a position. But what exactly is “short selling”?
Short selling refers to the opening of a position through the borrowing of an asset that an investor thinks will decrease in value. They then sell these shares to others who are willing to pay the market price. The borrower is asserting that before they return the shares, the price will drop and they will be able to buy back the asset at a lower cost. In this approach, the asset shares are returned to the original owner, and the borrower profits from the price difference.
Another asset class available to investors are options. Options give the buyer the right to buy or sell an underlying asset at a given price up to and on a certain date.
Options are known as “derivatives” because their value is derived from an underlying asset. They are a powerful tool that can enhance your portfolio by increasing income, and adding protection, and leverage. Commonly, options can be used to hedge against a declining market and limit losses.
An example of an options-based approach is a married put strategy. In a married put strategy, an investor purchases an asset while simultaneously purchasing put options for the same number of shares. This strategy works in an analogous way to an insurance policy. By using this strategy, the investor sets a price floor to protect themselves in the event that the asset price incurs a large drop.
The 130–30 strategy is often referred to as a long/short equity strategy. It is a modus operandi for investment used by institutional investors that is defined by allocating 130% of starting capital to long positions. The excess of 30% is generated from utilizing starting capital to short stocks. This strategy appears to have better risk-adjusted returns than the major averages.
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