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Market Hedges


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I just got done reading A Deacade of Delusions by Frank Martin and his 2010 annual report.  He appears to have purchased out of the money put positions similar to Fairfax.  My question is how many of you have such hedges and for how long and at what strike price.  I was thinking of setting up a hedge but wanted to know what other folks have done and rationale.  TIA.



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Guest Hester

I like calls on the VIX. It gets cheap when it gets in the mid teens, 15ish. 20 is the historical average. It got to 40 during the BP mess last year and 80 during the height of the credit crisis.

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Illiquid & lower quality securities to long-term accounts (time as the hedge)

All margin retired. Positions reduced to 50% long, 50% cash (cash as the hedge)


Optimizes under a moderate market sell-off - re-purchase & re-leverage at lower prices once volatility declines. Deeper the sell-off the more the up-front gain, & the longer the recovery will take (essentially a bar-bell). Moderate opportunity loss if markets jump (assumes nimble repurchase).


Small price for dodging the bullet.



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