Don't let the Bear send you into a panic frenzy

Using a typical hedge strategy with options and futures

Taking advantage of lower prices to rebalance your portfolio

Bear markets when they happen are never a pleasant event for any investor. Long only investors especially tend to be the worst hit. If you are wealthy enough to invest in Hedge Funds you may be damaged less, if you chose the right managers and the right strategies. Despite the pain felt, market corrections if managed correctly, should be seen as an opportunity.

Many investors run for the door when markets become volatile, meaning the turn south sharply. Yet that may not be the best choice. There are certainly more alternatives to simply cutting your positons in stocks. If you have built up a portfolio of stocks you feel will perform brilliantly and have an exciting future ahead you may not be willing to take losses simply because the market is making a correction.

Another reason not to sell is that you are most likely to sell when the market is bottoming out. Most investors will sit with their stock positions and ride the volatility rollercoaster. The thinking, which is also true, is that at some point the economy will become expansive again and the market will correct itself. But then that turn around takes longer than expected and when the pain is too much the positions are liquidated. Unfortunately that often coincides with market lows or near market lows and a lack of confidence to get back into the market.

Typical Hedges 

Many equity hedge fund strategies make use of futures in broad indices in an attempt to eliminate the systematic risk of holding positions in shares. However the use of futures can be very useful even if you're not a stock trader but more of a long term investor. It's important to understand cyclicality and that there will be periods when the broad stock market will decline and investments may lose money, on paper.

So having a clear market vision can greatly help you offset market Bears when they happen. The general stock market seems ripe for an extended correction over the next months. So selling futures or buying put options may seem an obvious and effective hedge. These strategies however, if not well timed, can prove to be expensive to maintain especially when volatility is high.

Portfolio balancing

There's another way to ride lower prices without being exposed to more risk. Having positions in futures or options even if they are offsetting to your stock positions can still create negative cash flows. Portfolio rebalancing involves bringing your portfolio allocations back in line with your initial ratios for each asset or in line with another specified rule. There are two ways to implement this strategy; Constant Mix and Constant Proportion.