April 27, 2010

The Ultimate Hedge

Filed under: Commentary — Tags: , , — zelator @ 4:32 pm

It is a brilliant idea – instead of just investing in one thing…which may lose money…you invest in a whole bunch of things.  Odds are good that if you pick things that are unrelated, like equities and futures, that you won’t lose both positions.  Hedge funds exist mostly because of traders’ competency in picking these various investments, and if they pick right, they get to drive a Lotus.

If you like to gamble, as I do upon occasion, you might enjoy roulette.  It’s a fairly basic game – rotating wheel, little ball plunks into the slot and there you go.  You don’t have to pick a number, you can bet on all kinds of things!  You can, for example, bet that the ball will land in a red or a black slot.  If you win, you get paid 2:1!  An amusing diversion, but certainly no way to make a bundle.  If you think, for example, that you can HEDGE by betting both red and black, you will be in for a surprise.  Not only will you break even on red and black, but you will LOSE if the ball falls into one of the two green slots, marked with a single and double zero.  That is how casinos work – the odds are stacked against you before you even walk in the door.  That is not how Wall Street works – it is the exact opposite.  The odds are already stacked in the favor of the players, who – except in the most unusual circumstances – can NEVER lose.


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