Most funds - except a few sector funds that focus on a small area - avoid heavy exposure in a single stock. Even those that do have such big positions will generally liquidate early in the process - it is a rare money manager who hangs on like grim death as a stock declines into oblivion.
However - you asked about mitigation. One easy approach would be the purchase of put options. I don't know how familiar you are with options, so I'll take the liberty of talking about them.
An option is a contract that can be traded in the open market. A put option permits the owner of the put to force the seller of the put to purchase 100 shares (usually) of a stock, any time before a specified expiration date, at a specified price - which is called the "strike price". So, if the stock goes down, the option owner can "put the stock to" the option seller.
Suppose a hypothetical stock is selling for $20 per share, and we were concerned it might go down. We could purchase an April 2009 put with a strike price of 15. We might pay as little as $25 to purchase it. So if our stock went to $10 per share, we could force the other person to pay $15 per share any time before the expiration date in April. Cheap insurance, right?
We could also sell a call. The call permits the buyer to take the stock away from us at a given price. Suppose we sell an April 2009 call at a strike of $20. And suppose we get $150 for it. If the stock sinks to $19 per share, we have a loss on the stock of $100, but a profit on the calls we sold of $50 (the $150 we got for selling it, minus the $100 loss on the stock).
All the numbers are hypothetical, of course, and purely for illustration.
You can see an example of calls on LEH
HERE. Calls are at the top, puts at the bottom.
Individuals can do this too, but it generally works best for a large portfolio - such as a mutual fund.
Hope that helps...
Quote:
Originally Posted by CoLawman
Nmap,
For those of us with mutual funds, what action does a fund manager take to mitigate losses when the fund has substantial holdings in, say a Lehman? I assume (the alternative is too frightening) they are doing something!
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