John Hussman's Hedging Dilemma: When Protection Becomes the Problem

What happens when an investment manager predicts a market crash correctly but the market refuses to crash for nearly two decades? This question sits at the heart of John Hussman’s experience managing his flagship mutual funds. Born in 1962, Hussman earned a Ph.D. in economics and built an impressive resume as both an academic and financial professional—options mathematician at Peters & Company, economist at the University of Michigan, and author of the widely-followed “Weekly Market Comment.” Yet despite his credentials and his prescient 2007 warning about the impending financial collapse (which proved accurate when markets tumbled in September 2008), john hussman’s investment approach has faced a unique kind of curse: being right about the ultimate direction of the market while being painfully wrong about the timing.

The Impressive Start That Set High Expectations

In the late 1990s, john hussman founded Hussman Strategic Advisors and quickly earned guru status. Between 1999 and 2003, his funds delivered double-digit positive returns while the S&P 500 suffered large negative returns—a track record that commanded respect and attracted capital. The man who understood options mathematics, who could spot a housing bubble forming years before it burst, seemed positioned to be a generational investment talent. His ability to navigate the 2008 financial crisis with a 9% loss (versus the S&P 500’s 37% drop) further cemented this reputation, even with his heavy hedging in place.

The Strategic Growth Fund: Building the Perfect Hedge

To understand john hussman’s challenge, one must examine the structure of his flagship vehicle, the Hussman Strategic Growth Fund (HSGFX). The fund manages approximately $351 million in assets and employs an unusual portfolio composition: roughly $377 million in long stock positions paired with approximately $370 million in short positions via options and futures contracts. This means the fund’s short positions represent 98% of its long equity exposure—a level of protection that reveals the manager’s deep conviction about downside risk.

The fund’s prospectus clearly states its dual objectives: long-term capital appreciation tempered by “protection of capital when market conditions are threatening.” On paper, this sounds prudent. In practice, however, it created a structural problem. For the fiscal year ending June 30, 2017, the fund lost 15.53%. Owning a massive short position during a rising market is a formula for catastrophic returns—and that is precisely what john hussman has experienced repeatedly over the past decade.

A Decade of Losses: The Underperformance Record

Since 2006, the performance record tells a troubling story. Over a ten-year period, john hussman’s Strategic Growth Fund registered just two years with positive returns, each under 5%. The other eight years? Negative. The cumulative result: the fund trailed the S&P 500 by 137%, representing an average annual underperformance of 12.1%. This is not a minor drag on returns—this is a systematic erosion of capital over time.

The Hussman Strategic Advisors family includes four mutual funds with combined assets under management of approximately $751 million:

• Hussman Strategic Growth Fund: $351.44 million
• Hussman Strategic Total Return Fund: $363.52 million
• Hussman Strategic International Fund: $30.25 million
• Hussman Strategic Value Fund: $6.51 million

The assets under management declined as performance deteriorated—an unsurprising outcome when investors vote with their feet.

The Paradox: Right Strategy, Wrong Timing

Here is where john hussman’s story becomes philosophically interesting. The fund’s prospectus includes a revealing chart showing three potential outcomes: the actual hedged fund performance, the S&P 500, and what the fund would have delivered without any hedging whatsoever. That unhedged hypothetical version? It would have performed brilliantly, easily outpacing the benchmark.

This unhedged alternative reveals the core tension. John Hussman constructed his strategy to perform well in a complete market cycle—up phases and down phases. He emphasized that “the bull market that has been around since 2009 is just a half cycle,” betting that when the inevitable downturn arrives, his hedging would protect capital while allowing subsequent gains to multiply his returns. The math works perfectly—if the market does indeed collapse. The problem is waiting nearly two decades for that collapse while capital erodes in real time.

The Opportunity Cost Nobody Likes to Discuss

This brings us to the uncomfortable reality: opportunity cost. Every dollar sitting in a john hussman fund waiting for the predicted market decline has lost purchasing power and compound growth potential. A dollar invested at any point in the past twelve years now represents only a fraction of its original value when measured against the S&P 500 return.

Consider the mathematics: 12.1% average annual underperformance applied consistently over a decade compounds into massive capital destruction. For investors who purchased expecting to beat the benchmark, the experience has been painful. As one analysis notes, they are effectively “selling dollar bills for 40 cents.”

This is the opportunity cost that neither brilliant minds nor sophisticated hedging strategies can fully address: the cost of being early. No matter how sound the underlying thesis—and the case for future downside protection remains intellectually defensible—what matters to the investor with capital deployed is today’s returns, not tomorrow’s potential.

Learning from the Hedging Trap

John Hussman is not alone in facing this dilemma. The story parallels that of Prem Watsa and Fairfax Financial Holdings (FFH), another value-conscious manager who also maintained significant hedges during the post-2009 bull market. However, Watsa experienced only two losing years in the same ten-year period and, notably, trimmed back his hedging positions after Donald Trump’s 2016 election victory, anticipating tax reform and regulatory relief would boost markets. The timing of that hedge reduction matters—it allowed Watsa to capture upside when it arrived.

John Hussman, maintaining his conviction in the incomplete market cycle thesis, has not made such adjustments. His Weekly Market Comment continues to emphasize the value approach and market-cycle perspective, but the market has simply not cooperated with the timeline.

The Central Question for Risk Management

The john hussman case study raises a critical question for investors managing their own portfolios: How much hedging is protective, and how much becomes self-defeating? Risk management is essential—perhaps even more important than stock picking. Yet excessive protection, applied with perfect fidelity for too many years, transforms from insurance into anchor.

The data from the Hussman Strategic Growth Fund suggests there may be a point where hedging passes from prudent to problematic. When 98% of your long positions are offset by short positions, you’re no longer running an equity fund with downside protection—you’re running an essentially neutral portfolio waiting for the precise moment when directional conviction matters. That moment is worth money if it arrives. It costs money if it doesn’t.

What This Means for Your Investment Choices

For investors still holding john hussman funds, the decision calculus has become more complex than simple patience. Patient investing works when you’re holding fundamentally sound businesses at attractive valuations. It becomes questionable when you’re holding a vehicle that is specifically designed to NOT participate in market gains, betting that your sitting costs will be repaid by downside avoidance later.

The Hussman story is not a story of incompetence or lack of intelligence. John Hussman possesses sophisticated knowledge of options mathematics, market cycles, and value principles. Rather, it’s a story about the limits of being right-but-early and the heavy cost that early conviction extracts from deploying capital.

For the broader investment community, it offers a valuable lesson: protection is not free. Every dollar deployed in hedging trades away potential upside for downside protection. That trade is worth making—until the day it isn’t. The challenge is knowing which day that is.