These days, I spend quite a lot of time teaching people about markets and trading and mentoring them as they start to invest their own money. Everyone is different in terms of their level of knowledge and their ability to grasp complex concepts quickly when we first meet, but there are some subjects that I cover where it seems almost nobody fully understands what is involved. One such subject is hedging. Even those who know what it means, in theory, have problems understanding its practical applications, and most think of it as a tool to be used in the context of short-term trades only.
That is certainly true with some hedges, usually of the leveraged variety. Buying a 3x bear S&P ETF or a VIX tracking product to protect your portfolio a bit when there is trouble looming is not a bad tactic, but the nature of those kinds of products makes it important that you use them only short term. There are, however, hedges you can use to protect against a specific risk to a long-term position or portfolio weighting.
I am sure that if you are reading this, you have an interest in energy investing, which in most cases means that you have a portfolio that most would consider to be overweight exposure to oil. That is probably by design and based on your feeling that, no matter what some might say, the world still needs oil and there are therefore good profits to be made in the industry. That is true, but it does come with risks.
Most notable among those risks is the…