One problem with some of the conventional wisdom regarding investing is that it doesn’t distinguish between secular bull and bear markets. What makes sense in a secular bull market doesn’t necessarily make sense during secular bear markets.
Conventional wisdom says that long-term investors should generally eschew hedging, since the costs of hedging can lower long-term returns. This may be true during secular bull markets (such as the one that started in 1982 and ended at the beginning of 2000), but I don’t think it’s true during secular bear markets (such as the current one that began in 2000). Below is a chart comparing the performance of John Hussman’s equity fund, which employs hedging, and the S&P 500 tracking ETF SPY. These returns are net of management expenses, which are a full percentage point higher for Hussman’s fund than for the index ETF.
Hussman Strategic Growth (HSGFX) versus SPY
I suspect that if Dr. Hussman had started his equity fund ten years earlier, and hedged it the same way, his fund might have underperformed the market over the 1990-2000 time period. But his hedging helped him outperform during the first ten years of this secular bear market.
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