While in case of a danger of a severe market correction or even a crash danger, we would also use our asset allocation in order to prevent our portfolio from such danger, this is not possible for "normal" substantial price decline situations.
such situations, we use (upon client´s request) our very highly experienced counter- weight methods with entry and exit stopps.
The counterweight itself consists of a future position which builds the exact opposite of the asset.
in case of the asset being 10 gold bars 400 oz each totalling 4000 oz, the counterweight would be 40 CME- GC futures (used with the "speculator margin without need for delivery" short (each equivalling 100 oz) which will be plugged- in at a certain
level and plugged out again when not needed anymore.
Where does the profit of the counterweight (hedge) occur?:
At first hand, everybody would - and rightly so - understand that once the price
of an asset goes down, the value of the hedge position goes up and therefore, the value of both together did not change, a loss was avoided.
In practice, the even more important function is the reduced risk in holding volatile assets (such as shares
and precious metals) in heavy quantities and avoiding holding bonds or alike for "safety". As a result, more of the underlying is kept in valuable assets and it is the long term increase in those which creates most of the performance of our method. The
ability and readiness to hedge and protect when needed allows another portfolio than one would have without such ability.
The hedge itself avoids the loss. The different composition of the portfolio is the key profit contribution.