Actively managed investment portfolios often employ hedging strategies against market risk in order to isolate and emphasize the stock selection skill of the portfolio managers. Typically, this is accomplished by hedging the actively managed portfolio against a capital weighted index, such as the S&P 500. This practice is based upon the assumption that the selected capital weighted index accurately tracks common market risk. In other words, the index does not contain any significant single stock idiosyncratic risk. Consistent with these assumptions, the hedge ratio for a particular actively managed investment portfolio/capital weighted index combination is determined by performing a linear regression of the investment portfolio against the capital weighted index.
USPTO Backgrounds
USPTO Backgrounds