9 Comments

Back in my dim and distant past I worked at a bank where the equity strategist collaborated with a professor to write a long paper showing comprehensively that systematic hedging with put spreads doesn’t work. Much like the paper you quote here. My boss (head of derivatives sales) was furious. I was tasked to write a rebuttal, which I did. Almost 20 years later I still stand by my conclusion: systematic hedging strategies don’t lose money because they are wrong, but because they are lazy. It boggles my mind that people who think deeply before they choose to invest then abdicate all thought before hedging. The Price — and hence the Value — of hedges change all the time. If you don’t heed this simple rule of markets you’ll lose money. Whether you “invest” or “hedge”.

I’m also amazed analysis of systemic strategies in academia is still a thing. Shame on professors.

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"systematic hedging strategies don’t lose money because they are wrong, but because they are lazy". Totally agree. The problem is the "magnitude" of the funds that use them, in terms of possibility of adjustments. The larger the funds that use systematic hedging strategies, the harder it is for them to adjust their positions when the market moves against them.

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When you announced this series, I was looking forward to the entry on Energy Cost of Energy. Does this Cassandra defy debunking?

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I don't even know what that is. Never heard of it. Do you have a link, please?

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Hi Joachim, I am genuinely surprised to hear this. You could enter the rabbit hole via https://surplusenergyeconomics.wordpress.com/18531-2/ by Tim Morgan. Have fun.

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I see that Tim Morgan wrote the Wikipedia page already referenced. He has been developing the theme on his website for about 10 years!

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Excellent "cherry picking" essay. Using the data that you choose. Remind readers that WHEN you buy really matters,.... a lot. Stocks can really become overvalued at times. It can take a decade to just break even. There have been long periods where fixed income outperforms stocks. see 2000-2020. Risk free.

Use tools like the "CAPE 10" to guide you. Unless your time horizon is forever, "timing" like in life, is everything.

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I have really enjoyed your “Against Cassandras” series and have taken it as motivation to go after the commercial real estate Cassandras that are prevalent today. It seems only fitting since I spent over ten years trading distressed CMBS through the aftermath of the GFC and have become somewhat knowledgeable of the broader CRE industry. In general Cassandras are linear thinkers, whereas most problems are non-linear by nature.

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