Finance Professor: Five Hedging Techniques You Must Know

• The Spyders: Recalling that the sample portfolio had risk of $2,619,000 vs. the S&P 500 Index. The S&P 500 ETF, commonly called the "Spyders" (SPY Quote), is a trust that replicates the S&P 500. The Spyders are now selling for about $153 per share. Thus, you can short 17,117 shares of SPY ($2,619,000 / $153) to hedge your sample portfolio.
• Sector-specific ETFs: If you are trying to hedge an individual stock, you may want to utilize a sector-specific ETF to achieve our risk management objectives. For example, I own CVS Caremark (CVS Quote). CVS is a component stock in the Retail Holdrs ETF (RTH Quote). I could hedge out some of my CVS risk by short-selling the RTH.
• Inverse and levered inverse ETFs: Whole new classes of negative correlating ETFs have been recently listed. These ETFs allow you to buy downside protection in an index. Using the SPY as an example, the Short S&P 500 ProShares (SH Quote) and the Ultra Short S&P 500 ProShares (SDS Quote) will appreciate as the SPX declines and will decline when the SPX increases. The SDS provides a double leverage impact on movements in the SPX.

As with the use of futures, ETFs will provide imperfect hedges and could result in adding more risk rather than reducing risk to your portfolio. (To learn more about ETFs, visit TheStreet.com's ETF Center.)