# How can I hedge my junior silver miners portfolio?

June 7, 2012, 12:00 PM Przemysław Radomski , CFA

I have the junior silver miners in my portfolio. Suppose they have a value of \$100k. How can I hedge this using ZSL? Do I need to purchase the same amount, \$100k? I don’t have enough money for that strategy!

Please note that hedging silver juniors with an ETF will not result in a complete immunization of the portfolio to lower prices, because the prices of the shares will move a bit differently than silver, even if they move generally in the same direction (the link between gold and GLD ETF is much stronger, for instance). So, selling a part of the position and hedging the rest appears justified to be better idea in case of juniors. We will move to that in a few paragraphs.

It's impossible for us to calculate the necessary amount of ZSL or any other ETF/ETN because we don’t know the exact structure of the holdings. Generally, we would regress the average performance of that portfolio against ZSL to calculate the beta coefficient. However, there is also a much simpler approach that you can use. It's less precise, but should produce a similar result:

Step 1. Check how much your portfolio declined over the last month. Let's say it was 10%. This will be A.

Step 2. Check how much higher ZSL moved over the last month. Let's say it was 30%. This will be B.

Step 3. Calculate the following: (Current value of your portfolio / Current price of ZSL) * (A / B). You will get the number of ZSL shares that you should buy to hedge your portfolio if there is another move lower in silver.

Assuming that you had \$10,000 and ZSL's price was \$60, you would buy: (10,000 / 60) * (10% / 30%) = 55.56 => 56 (rounded) ZSL shares.

If you can't afford to purchase the hedge, then you could sell part of your holdings and use it to buy a hedge for the remaining part of the portfolio. The amount that you would need to sell is: (Current value of your portfolio * A) / (A+B). In the above example, that would be (\$10,000 * 10%) / (10%+30%) = \$2,500. So, you would sell \$2,500 and use it to purchase ZSL. Since in this example ZSL moves 3x more than your portfolio, you should theoretically have a hedge that is 1/3 as big. And this would be the case as \$2,500 is 1/3 of the remaining amount which is \$7,500.

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