Home > bonds, hedging, stocks > Hedging Equities with a Levered Bond Position

Hedging Equities with a Levered Bond Position

In Steve Drobny’s excellent book “Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money”, Jim Leitner mentions the possibility of using a levered bond position as a hedge for an equity-oriented portfolio.

Unlike a protective put buying strategy or a long position in Vix futures, bonds have positive carry.  The best way to test the merits of a hedging strategy is to compare the individual performances of the market, the hedge, and the combined entity. So we tested the following scenarios:

  1. 100% Allocation to S&P 500
  2. 100% Allocation to US Treasury Bond futures (returns don’t include t-bills)
  3. 100% Allocation to S&P 500 cash and 100% to US Treasury Bond futures rebalanced monthly

Here’s a plot of the returns for each portfolio from 1987 to present.

Here is the statistical breakdown of the results:

(Data source: St Louis Fed FRED Database, Robert Shiller)

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Categories: bonds, hedging, stocks
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