This article is a mere list of good and bad hedge techniques used by firms and institutions to protect the principle amount against negative uncertain risks (reducing downside).

List of bad hedges:

  1. Diversification used in an inorganic manner to protect against ignorance and speculative behaviors
  2. Selling underperforming assets before quarterly and/or annual reports to inflate a fund’s performance without concerns of long term opportunity costs.
  3. Stop gains to secure profit without any evaluation of the business cycle and showing disregard for specific corporate evaluation and long term opportunity costs.
  4. Use of future contracts and derivatives without any investigation into the value of such contracts and the method of creating them (1960s AMEX oil crisis and 2008 CDO created financial crisis).
  5. Gold, Cash, and speculating on other commodities such as Bitcoin without any regards to intrinsic value

List of good hedges:

  1. Organic diversification: when business equities are bought with an understanding of business value and long term prospects in mind (Berkshire Hathaway).
  2. Stop Loss: This is a good way to not cry over spilt milk and quantifiably admit that you were wrong about a certain position.
  3. Keeping US treasury bonds to protect against inflation and deliver a near guaranteed return on principle.
  4. Investment in the S&P 500 index funds for at least 25% of capital to cover any missed opportunities
  5. Keeping a small, tightly understood, and relevant portfolio rather than pretending to know it all (being humble).

Key things to note:

Throughout my career so far, I’ve learned that investment is more about knowing what not to do and what to avoid rather than what to do. Well, at least at this point I know more of what not to do rather than what to do.

I plan on updating this article with more to add to both of the lists and will hopefully be able to write about each topic in an article of its own with examples, data, and behaviorism to support my claims.