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Have an index tracker set up and running and would like to further
diversify? Then a simple hedge strategy might be a good area to look
into.
Open an account with the likes of Deal4Free, visit the US based Motley Fool (www.fool.com) and check out this message - get up to speed with the concept and start trading.
You might like to click the 'Threaded' option and follow the link as some interesting insights into setting up a hedge strategy are described.
It would appear that whilst Relative Strength methods have performed very well historically (e.g. shares that have recently performed badly tend to continue to perform badly whilst recently strong shares tend to continue to be strong), by using a blend of going long (buying) relatively strong shares and shorting (selling) relatively weak shares results in an overall position that has decent overall gains whilst improving risk/reward levels (greater returns for less risk).
Basically your buying and selling into the market at the same time. If the shares you buy outperform and the shares you sell underperform, then overall you gain from the hedge position. Such a strategy is somewhat market neutral in that if the market moves either up or down you can still make significant gains overall. Such a strategy also somewhat helps in offsetting the costs of having positions open overnight (e.g. you pay interest against positions that are long, but receive interest payments against your short positions, so if equal amounts of cash value in both your short and long positions, then your overnight interest level is effectively zero).
