More self-managed super fund (SMSF) trustees are using the power of contracts for difference (CFDs) as hedging tools within their funds to protect their core portfolios, according to Capital CFDs.
This is particularly the case after years of extreme volatility in local and world markets, with the Australian market experiencing its worst weekly performance in 2012.
Since 2007, SMSFs have been allowed access to CFDs, a change which Ashley Jessen, head sales trader for Capital CFDs, believes has given trustees a cost-effective and efficient tool for hedging as opposed to traditional methods such as options.
"If an SMSF holds 2,500 ANZ shares, then an options hedging strategy would require 25 separate options contracts to be written [options over Australian shares are written in 100-share contracts]," he said.
"Whereas, a single CFD trade could protect the ANZ shares on the downside, which is essential during market downturns such as recently when ANZ fell just over 12.5 per cent in 13 days."
Jessen said that instead of being exposed to a 12.5 per cent drop in ANZ, an SMSF investor positioned via hedging could have positioned itself to limit that downside for minimal outlay.
"This explains the growth of CFD trading by SMSF trustees to 'short' their own portfolios to protect the value of the core portfolio in case of a market slide," he added.
And instead of using CFDs to speculate, Jessen said that smart investors could use them for risk protection measures and to reduce exposure to local stocks that have since fallen out of favour in the market.
"Experienced investors who understand leverage and who are looking to use CFDs for risk protection are well advised to consider this technique further," he outlined.
"Euro zone announcements that spook investors and drive markets down are all too common nowadays, so investors need to consider all the tools available to limit their downside and lock in profits."