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Hedging Portfolios with Short ETFs

Author

Listed:
  • Thorsten Michalik

    (Deutsche Bank AG.)

  • Leo Schubert

    (Constance University of Applied Sciences. Germany.)

Abstract

Fund Management today uses the active and passive way to construct a portfolio. Exchange Traded Funds (ETFs) are cheap instruments to cover the passive managed part of the investment. ETFs exist for stock-, bond- and commodity markets. In most cases the underlying of an ETF is an Index. Besides the investment in ETFs, for some markets, short ETFs are listed. Short ETFs allow funds manager to earn in bearish markets and therefore, short ETFs offer a competitive hedging possibility. To get some insights in the value of short ETF as instrument for “perfect” hedging, empirical data of the German stock index DAX are used. Obviously, using short ETF for hedging cannot completely neutralize losses of the underlying instrument. The “cross” hedge of an individual portfolio by ShortDAX ETF depicted a strong risk reduction. As risk measures, the variance, the absolute deviation and some different target-shortfall probabilities are applied. To find efficient portfolios for the cross hedge, two algorithms were developed, which need no linear or mixed integer optimization software.

Suggested Citation

  • Thorsten Michalik & Leo Schubert, 2009. "Hedging Portfolios with Short ETFs," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 8, pages 1-23, December.
    • Handle: RePEc:eac:articl:09/08
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    References listed on IDEAS

    as
    1. Crama, Y. & Schyns, M., 2003. "Simulated annealing for complex portfolio selection problems," European Journal of Operational Research, Elsevier, vol. 150(3), pages 546-571, November.
    2. Hiroshi Konno & Hiroaki Yamazaki, 1991. "Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market," Management Science, INFORMS, vol. 37(5), pages 519-531, May.
    3. Charles D. Feinstein & Mukund N. Thapa, 1993. "Notes: A Reformulation of a Mean-Absolute Deviation Portfolio Optimization Model," Management Science, INFORMS, vol. 39(12), pages 1552-1553, December.
    4. Leo Schubert, 2002. "Portfolio Optimization with Target-Shortfall-Probability Vector," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 1, pages 1-19, June.
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    Cited by:

    1. Leo Schubert, 2011. "Hedge ratios for short and leveraged ETFs," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 1, pages 1-1, June.

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