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What is a clinical position?

Quantitative Finance: What are the pros and cons of taking a big leveraged position and hedge it versus taking a smaller cash position?

  • Hedge funds and quants usually hedge their large (usually leveraged) trading positions to manage the risks. Small retail investors simply take a smaller cash position. I am a small retail investor and the professionals may find this question rather stupid. Why don't the professionals simply take a smaller position to make their lives easier? No need to find a hedge, no need to calculate the hedging size, no need to worry about counter-party risks, no leverage risks. What are the pros and cons of taking a big leveraged position and hedge it versus taking a smaller cash position?

  • Answer:

    When insurance is cheap (low VIX), risk/reward is better if you lever up and insure cheaply.   When insurance is expensive (high VIX), risk/reward is better if you lighten up and sell your insurance.   Of course, there are also other considerations such as the risk-free rate, R-sqared correlation between asset classes, etc.   Right now, volatility is very low.  VIX is low.  Insurance is very cheap.   Load the boat!   Just ensure you insure the boat!

Stacy Tidwell at Quora Visit the source

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The big reason is that you are the bookmaker and not the gambler. You have one customer that wants to bet that the horse wins.  You find another customer that wants to bet that the horse loses.  You don't want make money betting on horses, you want to make money from servicing the bets.  That means you need pretty big bets to make a decent amount of money.

Joseph Wang

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