Since the beginning of 2022, the markets have been in turmoil. The price of the Standards and Poor’s 500 index has fallen more than 25%, gold against the US dollar has lost almost 22%, and US Oil lost 29% of its price.
Although losing portfolio value in this market might seem inevitable, there are ways to hedge against these turbulent markets and even profit from them. Please note that this article will be a simplified view of hedging since the process can be quite complex.
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1. Buy Inverse ETFs
Exchange-Traded Funds (ETFs) belong to the Exchange-Traded Product (ETPs) asset class. Unlike mutual funds, ETFs are been traded openly in the markets and thus it is far easier to open and close a position with them.
The ETF with the ticker symbol QQQ is tracking the performance of the NASDAQ 100 index. When the index rises by 1%, the ETF follows that percentage.
The PSQ ETF on the other side is the inverse of the NASDAQ 100 index. When the index falls by 1%, PSQ rises by 1%. There are inverse ETFs for any asset imaginable.
Inverse leveraged ETFs will also amplify the reverse effect. SQQQ ETF amplifies this effect by x3. $Invesco QQQ Trust(QQQ)$ $SQQQ(SQQQ)$
The orange line is the PSQ ETF and the blue line is the QQQ ETF.
By purchasing an inverse ETF, investors can hedge or even profit in the short term from a bear market. “Short term” is mentioned because, in the long run, the market overall is rising more than it is falling, and thus reverse ETFs will be at a loss.
If a portfolio has just exposure to the NASDAQ index, then the effect of a reverse ETF on it will, most likely, cancel all of its gains and losses, so correct hedging allocation should be applied to it.
2. Short Selling CFDs
CFDs, although banned in the US, they are still available for European investors. CFD stands for Certificate For Difference and it basically is a form of a “bet” between a broker and its customer.
CFDs follow the price of their underline asset, but without their beholder owning any assets. They do charge a daily interest amount for holding them.
An investor can profit in a bear market by selling CFDs for the short term (weeks, or maybe months).
CFDs are leveraged products and thus they require a margin account.
3. Buy Put Options
Another way that an investor can profit in a bear market is by buying put options.
Put options give the right to their beholder to sell its underline stock at its strike price, but not the obligation. An options holder profits from the decrease in the price of the underline asset, as they have the right to sell it at a higher price.
In a short term, an investor can profit by buying call options against the biggest positions of his or her portfolio, as well as by themselves. An out-of-the-money or at-the-money contract, with a high probability of expiring in-the-money, and a bimonthly duration, can bring profit to one's portfolio.
Of course, the above recommendations need to be examined in a case-by-case manner.
4. Buy Different Asset Classes and Defensive Stocks
Another investing opportunity in a bear market can be buying defensive stocks. Although defensive stocks do also follow their index and thus are also falling in a bear market, they do not fall at the same rate as they provide products and services without price elasticity as they are necessities.
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