Every investor now and then wonders what it would be like to “put all his chips” on “the big one” and hope that one stock or sector fund will yield him amazing returns.
For example, if I had put my entire nest egg into Phoenix Real Estates Securities (PHRAX) last year (considering it’s good performance the years before), I would have received a 36.3% return on my portfolio last year.
Of course, only a fool would think of making such a volatile, risky bet.
But what if I offered the sale of a sector fund (or any other security deemed to have a good chance of yielding high returns) and promised to cover the portfolio’s losses up to 50% for a 8.5% premium? Or in other words, for 8.5% of your portfolio’s worth, I will cover all negative returns on your fund up to 50% at the year’s end, should this happen.
Seems silly, I know. Just wondering if this is a solid idea to build on.
csucdartgirl
May 21, 2010 at 7:20 pm
Most people already hedge on their own and don’t put all their eggs in one basket. Sounds like a waste of time.
SMEAC
May 21, 2010 at 7:46 pm
Sounds great, untill you cant cover the losses and your,clients hire organized crime figures to skin your family alive while you watch.
nate s.
May 21, 2010 at 8:20 pm
8.5% is not a small fee for those who would be interested in your insurance. Personally if I was interested in your sector fund and you offered insurance, depending on the estimated % of return, I would take it. Now my question to you is what are you going to do when everyone goes for your insurance and there is a HUGE decline in price? But hey It’s surely something to look into!
Founder, MastersoEquity.com
May 21, 2010 at 8:35 pm
Complete waste of time. I can simply hedge my portfolio anytime I want by going delta neutral during uncertain times and still make a profit without paying you!
rthorneindustries
May 21, 2010 at 9:00 pm
You’re risking 50% for 8.5%? Think about it guy… the odds are against you… extremely.
Jess2424
May 21, 2010 at 9:45 pm
The big houses do this all the time(Morgan Stanley and Merril Lynch do this alot). They make the market and new securities. Some of them are called spiders.
They can do it because they have the money to back up the loss’s and they hedge their bets more efficiently. Unfortunately, your example is WAY too much risky unless there is more to the story we don’t know. Banks will make money with this because of the spreads and playing both sides of the fences with put options.