As our portfolio is based on the acquisition of undervalued assets, hedging opportunities seen as selling volatility through call options on the index S&P500. Moreover, the number of shares in the portfolio is nine - so we definitely need derivatives. The advantage of value-strategy is in its long-term profitability and good returns in bad times (many investors use for value-shares as a refuge from collapsing growth stocks). However, in bull markets return on such shares is relatively low, so we decided to increase the profitability of selling volatility via call options on the market index. Also for risk diversification, we will add assets with negative correlation with respect to the value of the shares. An important indicator for the sale is the state of the popular volatility index VIX. Now it shows the relatively low volatility and a good time to sell options. Under the sales of volatility, we have in mind the sale of such call options with a low probability of execution (at the current index in the index 206.05). According to this plan call is still safer than put - in the case of a black swan we have received less returns, but do not stay in debt, as in put. Selling of volatility is a classic strategy of "selling lottery tickets" with high positive returns, but with thick tails. Since the bulk of our portfolio consists of shares in sustainable companies with more liquid assets + sector, which do not suffer so much in a recession, and weakly correlated with each other, the adoption of this risk is justified. Since we are dealing with international corporations, the exchange rate plays an important role in their activity. A strong dollar negative impact on the company's sales abroad, which causes a movement of stock prices down. Because of this, we need to somehow reduce the potential financial risks. Since the strengthening / weakening of the dollar due to the great uncertainty and, consequently, revenue of companies included in our portfolio, we buy futures on the dollar Obviously, the dollar against the euro is very strong right now and fall is unlikely. The graph shows the index of the dollar against other major currencies: Euro, yen, Pound sterling, Canadian dollar, Swedish krona Swiss franc (each of these currencies has its own weight). As you can see the dollar strengthening, preconditions to any reverse movement are not observed. Since asset prices are falling in our portfolio with a strong dollar, we must hedge their risks that should bring benefit from a strong dollar. Source: Antti Ilmanen “Expected returns” Tips (inflation-protected bonds) perform in hedging dual role: on the one hand, inflation is dangerous for the stock-dividends, on the other hand, the asset is negatively correlated with return on the ordinary shares. Their number will vary depending on the expected inflation in the United States. Now we appreciate their share in the portfolio of just 3-5%, but it may increase by the Fed's decision and the report of key macro indicators. In addition, in our case it would be advantageous to make the portfolio a more "active" and to protect investors from short-term fluctuations. This can be achieved by combining value and momentum strategies. Source: Bloomberg, Ken French Website For a long period of time the value shares (VMG - value minus grow) really bring more revenue, but is it in the short term? Not really. It is unpleasant to receive about zero return in a bull market, when growth stocks bring huge returns. For a better risk / return ratio and giving more realistic look of strategy (hedge fund manager can be fired for poor performance until the profitability of value), we offer to invest part of the money in the momentum of ordinary shares. The ratio will depend on the current market situation and the level of volatility. Since the momentum suggests a much larger transaction costs (commission spreads) it would be wiser to use it in markets with high volatility. The table shows how strong negative correlation between these two strategies, especially for our US market. It is shown in different reactions strategies at bullish and bearish market. In a bullish market for value I miss a lot of profitability and at the same time shows itself well in a bearish market. It is preferable to choose stocks, performed well in the interval of 12 months: due to less noise and higher historical returns. Source: Novy-Marx (2009). Thus, we do not change the ratio of value out of assets in the portfolio, but reduce their share depending on market conditions. With the active growth of the share of the momentum can be up to 40%. This kind of weighting volatility. With respect, we do not stick to any particular assets and recommend to use special programs. In conclusion, having a fairly low risk of 3% and a low beta, we increased profitability by "alternative beta", that is, the premium for the sale of short-term fluctuations and volatility. In addition, reduced currency risks by using bonds.