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What are some good hedging techniques? What is Fairfax using as a hedge?


shan
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This year, Prem Watsa said that Fairfax is 100% hedged and that he's afraid of a repeat of 1930s style recession. His main point was that 1929 stock market crash was lot smaller than the bigger drop which came in 1933-34. So he's sticking to hedging, even if it leads to big losses. His words - "we'll be wrong a couple of times, but when we're right, it will make up for it".

 

I am convinced that the market is overvalued because:

1. I cannot find many undervalued opportunities.

2. Prem Watsa said in 2014 Annual report and shareholders meeting that more things can go wrong than right. For example, the fed induced low interest rate is pushing all asset prices high, China has massive housing bubble, Europe in going into a triple dip recession (atleast Italy) etc.

 

So I wanted to ask what methods are the members of this forum using for hedging. Some of my ideas have been:

1. Basket of shorts for tech overvalued stocks (I am from tech and based in Silicon valley, and I think its crazy overvalued)

2. SPY puts

3. What is Fairfax using for hedges?

4. Stay in cash (as dry gun powder?)

 

I'd like if we could discuss more ideas and their pros and cons.

Thanks,

Shan

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Hi Shan,

 

Nice post.  Regarding hedging, I've done some of what you've mentioned.  I'm short AMZN, LNKD, NFLX, THC and TSLA.  These are small positions, but it's still painful watching them advance.  I have Jan. 2016 IWM and IBB puts and Jan 2016 IAU and SLV calls.  I don't think buying SPY puts is a bad idea, but feel like IWM is more overvalued.  Also, I'm long Fairfax.   

 

I'm not buying much these days (added to BP on the sell off yesterday and Russian equities here and there).  I'm not selling anything, but regularly sell calls on several of my longs and puts on CTCM, NBG and SHLD (which I'm long).

 

I don't know much about Fairfax's hedges, but believe Prem is betting against the Russell 2000 and betting that CPI will decrease. 

 

Thanks,

Lance

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1.) Are you able to admit that you were wrong on some of your shorts and cover with losses that exceed your initial investment? Otherwise its only a matter of time to go bust that way.

2.) In my eyes a good idea, because you can play it as a volatility/mean reversion bet.

3.) Don`t know.

4.) Cash helps to sleep at night, good idea. (Even if racemice will say something else, but its the only asset that nobody likes at the moment)

 

Personally i am beta hedged with S&P500 and MDAX puts since june and i am very pleased with the results so far. I had my biggest mistakes in june this year when i tried to short with futures and individual names and i was not mentally prepared for the consequences. With the puts i always say to myself that my problems get smaller with every further upmove.

 

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Hi Shan!

I'm just a simple retired long-term buy and hold investor who has been long FFH for over 20 years. So now that FFH has grown to nearly 50 percent of my portfolio I am currently content to let Prem figure out my best hedging strategy! (But the jury is still out as to whether I'm doing the right thing!)

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1. Hard to sleep shorting tech. Someone at the Columbia Value Investing Conference once said that it's much easier to short the restaurant/retail stock on its last leg and dying on the side of the road.  You're just there to put a bullet in its head.  I really am not an expert of shorting, although I've had a couple that worked out. 

2.  I think SPY works.  Doesn't seem overtly cheap.

3. Short indexes outright and Prem bought deflation CDS from "too big to fail banks around the world" (He was reluctant to state who the seller was, I kept badgering him during the shareholder meeting)

4. Cash is always a good option.  If you hold 50% cash and the market dropped 40%, you are likely going to be down 20% (assuming your holding drops the same amount as the market).  Holding cash also stops you from investing in that nth idea that should've never been allocated to in the beginning. 

 

 

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