Investment strategies to hedge against market volatility

Whether you’re new to investing or have been in the market for years, volatile times can make all investors feel a little lost in the market sea, searching for safe harbor. Along with expectations of higher returns, novice investors must also bear the impact of market forces such as inflation, rising interest rates and market conflicts. These are a troubling combination of macroeconomic factors that often tempt newcomers to withdraw from the market altogether and question their long-term investment strategies.

Market volatility, a statistical measure of the market’s tendency to rise or fall sharply over a short period of time, can be affected by tax changes in interest rates, inflation rates, day traders, short sellers, and high-frequency firms and other monetary policies and may also be affected by industry changes and national and global events. But one thing that is certain about market volatility is that it is inevitable. The market will continue to fluctuate between good days and bad, and bumps like these have many investors looking for portfolio strategies on how to navigate this market. While no one can predict the market’s next move, there are strategies investors can consider implementing to help manage their portfolios amid this volatility.

Hedging against volatility

To navigate through the volatile phases of the market, perhaps the most important decision for investors is to maintain a long-term horizon and ignore short-term fluctuations. One way to hedge the portfolio is by selling stocks or placing stop-loss orders that can be automatically sold when prices fall by a certain amount, or by buying a Nifty Put or Bear Put Spread ie. using monthly contracts or long-term options, after understanding the composition of the portfolio.

However, it should be noted that hedging or mitigating comes with additional costs and different underlying instruments have different betas. And many times instead of a perfect hedge, a partial hedge can also protect your existing position.

Multi-asset fund trading volatility

Investing in diversification, i.e. holding uncorrelated assets and stocks in a portfolio can reduce the chances of overall volatility. Some assets in the market do not exhibit the same degree of volatility as stocks, and as a result, alternative assets tend to lose less value and add stability. Therefore, unlike cash, alternative assets such as gold generate positive returns over time, as gold typically benefits from macroeconomic volatility.

Undirected investing

Contrary to the most preferred directional investing options, where markets move consistently in one direction, which can be either long for short positions or down for short positions, in non-directional investing, investors try to bypass market inefficiencies and price inconsistencies. As their name implies, non-directional strategies are indifferent to the rise or fall of prices and can therefore succeed in both bull and bear markets.

Invest in creating positions in stock futures

In a bear market, it is always advisable for investors to look at futures and options as a low-margin alternative to cash market trading. Here, investors can focus on higher-growth stocks and high-margin businesses that have high margins and traditionally exhibit high standards of transparency and corporate governance. And if you want to dive deep and be more adventurous, then you can also look into volatility strategies like straddle and strangle. These are your best bets and most likely to outperform in the midst of volatile markets.

Sometimes it’s good to do nothing

Being comfortable with your plan and portfolio is important, but it’s also important to know your tolerance for market volatility. As a general norm, the market works on two strategies, when to buy and when to sell, but there is also a third strategy that does not get as much attention as it should, ie. to know when to do nothing. And his rule of thumb is if you don’t understand the undertone of the market, then get out of the choppy water at the right time and do nothing.

Weathering the volatility storm

When it comes to financial markets, risk and uncertainty are a part of the deal that will never go away. Although risks can never be completely avoided, adversity can certainly be mitigated and portfolio hedging is one way to protect a portfolio against potential loss. This can help investors take enough risk and arm themselves with effective hedges until better days return.



The views expressed above are the author’s own.


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