Hedging Your Stock Market Bets

by Alan Lavine and Gail Liberman

Looking for a way to hedge your bets against another stock market blood bath? 

Harold Evensky, a high regarded Coral Gables, Fla.-based money manager, likes keeping a tiny bit of money in the Oppenheimer Real Asset Fund C. The fund invests in securities that track the commodities markets.  Commodities typically move in opposite directions to the stocks, They can also provide a hedge against bond losses when inflation is high.  Last year the fund gained 43 percent. By contrast, the S&P 500 lost 10 percent. 

Evensky recommends that investors broadly diversify among large medium, small company growth and value stocks. He primarily  sticks with index funds. But he's been hedging his clients bets,with the Oppenheimer Real Asset Fund C. 

Evensky says not to put more than 3 to 5 percent of your mutual fund assets in the fund because it is risky. Nevertheless, a small stake in the fund help cushion the blow against stock market losses. 

Of course when the stock market is performing well, the fund underperforms. Over the past three years the fund has grown at a - 1.23 percent annual rate. A small price to pay for a hedge. The fund is designed to track the Goldman Sachs Commodities Index.

History shows that this index has done well in almost every bear market in stocks since 1973. For example, in October 1987, when stocks lost a whopping 22 percent, this commodities index gained over 1 percent. In 1977, when stocks lost 7.2 percent, commodities gained 10.4 percent.

Of course this isn't a sure thing. In 1981 when stocks lost 5 percent, commodities lost 23 percent. 

The fund should be used as a hedge against stocks. "It's not total opposite," stresses Oppenheimer spokesman Greg Stitt. "But it's used as a diversifier." It typically zigs when stocks zags. There are  other ways to hedge your bets. Simply putting extra cash in money market fund should help cushion the blow of stock losses. Last year the average money fund gained 6 percent, while stocks lost 10 percent. You may not get as big a gain out of a money fund than from a commodities fund when stock plunge. But it is less risky.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show.

More articles by Al and Gail can be found here.