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Inverse Hedging

Investing in inverse hedging securities provides a strategic approach to protect against market downturns. These securities, often in the form of inverse ETFs or mutual funds, are designed to move in the opposite direction of the underlying index or asset they track. This means that when the market declines, inverse hedging securities can generate positive returns, helping to offset losses in other parts of a portfolio. They are particularly useful during periods of heightened market volatility or economic uncertainty. By incorporating inverse hedging securities, investors can achieve better risk management, reduce overall portfolio volatility, and enhance the resilience of their investment strategy.

What is an Inverse Hedge?

Inverse hedging refers to a potent risk diversification strategy achieved by investing in vehicles that are inversely correlated to other assets. This strategy actively manages positions of exchange-traded funds and notes (ETFs & ETNs) that uses various derivatives to profit from a decline in the value of an underlying index including, but not limited to, the S&P 500, NASDAQ Composite, and the FAANG stocks.

Sample Portfolio Composition

Inv FAANG & Tech

Inv US Markets

Inv Global Markets

24%

52%

Benefits of Inverse Hedging

Positive returns during market downturns: Inverse investment vehicles move in the opposite direction of the underlying index tracked, generating profits while the underlying asset falls in value.

Less risk than short selling: Inverse investments can produce similar results to short selling with a fraction of the risk and without the need for utilization of a margin account.

Risks of Inverse Hedging

Holding this type of investment during market rallies and overall bull markets may erode portfolio value. Specific types of risks such as compounding risk, derivative security risk, and volatility risk are also present in inverse investment vehicles. In addition, this strategy may hold leveraged ETFs/ETNs which could magnify losses in a market upturn.

Why We Inverse Hedge

Investing in inverse hedging allows us to generate positive returns even while the rest of the markets are falling. Opposed to just holding cash, which erodes value over time due to inflation along with client potential income needs, we employ this strategy in an effort to maintain account growth at all times. Because this strategy is not designed to be held long-term, we aim to tactically use this investment strategy during periods of market downturns only.