HEDGING IN GILT - EDGED STOCKS
Even gilt-edged and other fixed interest securities have not been completely immune from this week's selling and War Loan and similar stocks have shed half a point. This is partially a recognition that the European political risk has increased, at least on the surface, and there has also been some fairly extensive selling of gilt-edged stocks as a hedging opera- tion against holdings of speculative shares. The reasoning behind this kind of" bear" sale is plausible, although I would not commend such a policy except to investors or speculators who have uncomfortably large holdings of shares which would be vulnerable if, by any ill chance, the European situation were to take a serious turn for the worse.
In such circumstances it is certain that all speculative shares, in which one must include even the best industrial equities, would fall sharply, and so, too, would the gilt-edged market. On the other hand, if, as still seems probable, a major European conflict is avoided, speculative shares have excellent chances of improving, whereas it is unlikely that gilt-edged stocks will advance more than a point or two beyond to-day's prices. Ergo, hold on to the industrials but protect the position by a " bear " sale of gilt-edged. If things go wrong, the inevitable loss on the industrials will be offset at least partially by the fall in gilt-edged, which will allow the forward sale to be repur- chased at a much lower price, thereby yielding a profit. A naughty use, I grant, of the speculative facilities in the gilt- edged market, but really quite a justifiable form of insurance.
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