Stock hedge portfolios: A strategy for all seasons
by Larry Christy
If you're looking for a conservative way to make substantial profits in any kind of market environment,
you may want to consider common stock hedge portfolios. By balancing an equal amount of your capital
in long and short stock positions, you can reduce market risk and take advantage of the ability of some
stocks to outperform other stocks.
For an example of the theory behind this strategy, just check The Wall Street Journal's listing of
yesterday's biggest percentage gainers and losers among common stocks. On any given day, there are
likely to be some stocks that have gone up considerably in price and some stocks that have dropped
drastically in price. If you had previously bought the stock with the best gain and simultaneously shorted
an equal dollar amount of the worst loser, your profit would have been the sum of the two percentage
changes. On most days that would be in the 20%-to-40% profit range—far more than most investors
usually make in an entire year.
I don't know of any reliable technique for picking the best and worst stocks on a daily basis, but I can
show you how you can profit from the same basic strategy for conservative longer term investing. To get
started you will need:
• A margin account with a stock brokerage firm. Although you do not need to incur any margin debt
or interest expense for a hedge portfolio, brokers will require a margin account for handling your
• Enough capital to make it possible to diversify your positions among 10 to 25 common stocks on
both the long and short side.
• A reliable stock selection method that identified both potential winners and losers.
• A few minutes a week to review your portfolio and possibly make occasional adjustments.