Monday, May 7, 2012

The Perfect Hedge!

Warning: This post contains tongue-in-cheek sarcasm. Read at your own risk.

Since many investors are enamored with hedge funds and hedging these days, I thought I'd offer the perfect hedge. I think it has everything most people could want.

1. If we slide into deflation, it has exposure to long-term treasuries.
2. If we slide into more stagflation, it has protection against rising long-term interest rates.

What's not to like?

The Perfect Hedge

1. Put 2/3rds in TLT (long-term treasury fund).
2. Put 1/3rd in TBT (2x ultra short long-term treasury fund).
3. Rebalance daily at the close.

As seen in the following chart, during severe market corrections this hedge seems to be as good as cash. I will admit that it can't keep up with inflation over the long-term. Heck, it can't even keep up with buried cash over the long-term! It can, however, provide one with an awesome supply of zero-sum game derivatives-based protection with fees. And that is exactly what Wall Street needs in order to prosper. Throw them a bone here. Back up the truck on this perfect hedge sure thing!

Click to enlarge.

I should mention that I'm not counting daily trading fees in the chart. So what! It's only a few trades per day for the perfect hedge. And once again, we need Wall Street to prosper if we are to have any hope. Bernanke said so himself!

In all seriousness, I expected a constant drain as fund expenses took their toll. The downward trend is therefore not surprising. The shape of the curve is a bit surprising. I have offered a few opinions (in blue) which may explain it.

I think it is quite possible that the rush to hedge can push up the combination of TLT and TBT for a time. That's just supply and demand. Right? If so, then why are so many people hedging right now? Further, is it actually possible to go a full day without hearing the word hedge on CNBC? I think not.

Hedge! Hedge! Hedge! Hedge! Hedge!

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan, 1966

That would imply that there is no perfect hedge. Say it isn't so!

In any event, this is definitely not investment advice.

Source Data:
Yahoo: TLT
Yahoo: TBT


Mr Slippery said...

According to Jim Rickards, the families that preserve wealth over centuries do it with three things: real estate, gold, fine art. Fine art seems especially risky because of fakes and frauds, but if you have an authentic Rembrandt, I can see the long term value. What all three have in common is that they don't depend on the monetary system du jour.

I started out dirt poor, so no fine art for me, but as Meatloaf said, two out of three ain't bad.

Jazzbumpa said...


A couple of things.

Thing 1.

Thing 2.



Stagflationary Mark said...

Mr Slippery,

"Meatloaf" Hedge!

Stagflationary Mark said...


Very amusing!

Thing 3.

Stagflationary Mark said...

Don't underestimate the Arcopter - it will capture a market - May 1964

Jazzbumpa said...

Mark -

You win.


Stagflationary Mark said...


Well, you inspired me to play!

How can anyone compete with...

The Gem III Acropter. It can run on land, on water surfaces and, when the stub wings are used, can rise 6 ft for hedge hopping.

I'm thinking the 7 foot hedges led to its eventual downfall.

And as a side note, hopping a hedge and finding a trampoline would have to be fairly exciting too, lol.

dearieme said...

Good hedges make good neighbours.

Stagflationary Mark said...


I hear you. I spent the day fixing a fence.

And when I say a fence, I don't mean someone I might sell stolen goods to.

And when I say fixing, I don't mean using any form of corruption. The world has plenty of that already, lol. Sigh.

Jazzbumpa said...

I spent the day fixing a fence

Without your detailed explanation that would beg the question: up with whom?


Stagflationary Mark said...



fix up

I will fix you up with some alcohol and bandages.

Well, the fence did require some power tools, lol. ;)