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Author: globalist2013 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: Building an effective hedge Date: 3/25/2013 1:27 PM
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Are there any distressed bond investors... that actively hedge their positions using equity put options?

Peter,

I experimented with this technique last year, and I decided it wasn't worth the difficulties, the costs, the uncertainties. I used OTM LEAPS. Also, I simply went short the common of the issuer whose debt I owned. I broke even on my options (or a tad to the good) and made some decent money on the shorts. The hassle with trying to protect questionable positions is that you shouldn't be in them in the first place. You're just throwing good money after bad.

Step back and think about 'investing'. Not just bonds, but all of investing. You know from the get-go that you're going to suffer losses. That's both unavoidable and no biggie. Losses are merely a cost of doing business. So the question to be answered is "What's the most effective way to manage them?" Per Taleb, two possibilities suggest themselves: 'robustness' and 'anti-fragility'. Most investors think in terms of trying to buy "insurance". But the better strategy (or tactic) isn't a hedge that salvages most of one's value (think fire insurance on a house), but a strategy/tactic that pays off at multiples of one's losses.

No matter which asset-classes they own, what should have most investors not just worried, but terrified? Central bank stupidity, right? That's the threat to focus on, not individual investments. (IMO, 'natch) In short, be prepared to get massively short when the time comes to get short, and laugh all the way to the bank (if such things still exist). But as long as they don't close markets (or re-institute 'no-shorting' rules), any investor can not just protect assets, but increase them.

Charlie
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