Smart money, real results 

In Part 1, we stepped into the mind of a hedge fund manager: 

“Imagine you manage a $1 billion portfolio. You’re not just trying to grow money—you’re protecting it from disaster.” 

We learned why smart investors don’t just aim for high returns—they aim for safe returns. They use tools like CFDs and the VIX index to hedge against fear and flatten the impact of market crashes. 

But knowing the strategy is one thing. 

Does it actually work?

To test the theory, we created two portfolios with identical starting capital: $1,000,000. Both held 80% in S&P 500 stocks and 20% in cash. 

But only one reacted to fear. 

🅰️ Model A: The Classic 

• 80% in S&P 500 stocks , 20% in cash 

• No adjustments. No hedging. Just hold and wait. 

🅱️ Model B: The momentum hedger 

• Also begins with 80% in stocks and 20% in cash 

• But it watches the VIX (volatility index) — and reacts 

Here's how it works: 

• If VIX jumps by 35% or more over 5 days, and this happens 3 days in a row, the model opens a short hedge using CFDs, covering 70% of the equity position 

• If VIX drops by 20% or more in a single day, or falls below 20, the hedge is removed 

• It tracks these patterns automatically, using dynamic momentum — no fixed thresholds

Here’s where things get interesting. 

We tracked both portfolios from January 2019 to May 2025, covering major events like the COVID-19 crash.

Both started with $1 million. 

Both held 80% in S&P 500 stocks and 20% in cash. 

But only Model B (orange line) activated a CFD hedge when the VIX went above 25. 

And the result? 

📉 Model A (orange line) followed the market blindly. It soared in good times, but also crashed hard—especially during COVID and the 2025 scare. 

🛡️ Model (blue line) B was different. When fear spiked, it hedged. And the chart tells the story clearly: 

• During crises, it behaved maturely and stayed above throughout.

• In between, it recovered much faster. 

• And by the end? It finished with more value than the unhedged portfolio. 

Model B gave you a smoother ride — and got you a bit further. 

It’s one thing to survive a crash. It’s another to stay steady while the market throws a tantrum. So, who kept their cool? Let’s start with the numbers: 

Annualized Volatility 

• Model A: 16.48% 

• Model B: 18.92% 

At first glance, it looks like Model B was a bit more volatile. 

But here’s where the story gets interesting… 

📊 Despite a bit higher volatility, Model B delivered: 

• Higher returns (13.04% vs. 11.58%) 

• Better reward per unit of risk (Sharpe and Sortino ratios were both higher) 

• Higher profit and recovery factors 

• Less skewness and better balance in gains/losses 

And even with more upside action, it didn’t suffer more on the downside: 

• Worst Day was the same for both: -9.59% 

• Average Win % and Win Rate were both higher for Model B 

• Max Drawdown was nearly the same—but Model B recovered faster 

🧠 So what does this tell us? Model A felt “calm” only because it moved less. But Model B felt smarter — it took calculated risks, managed them well, and bounced back faster. For long-term investors, that emotional stability is critical. Because when the market shakes you up, you either hold steady — or hit “sell” at the worst time. 

✅ Model A was quieter.

✅ But Model B was calmer where it counts — in results, resilience, and recovery.

🔗 Details results GitHub

Returns are only half the story. 

What really matters is how much risk you took to get them. 

That’s where professional investors look at risk-adjusted metrics—like the Sharpe Ratio, Value at Risk (VaR), Expected Shortfall, and Maximum Drawdown. 

Let’s break those down in plain English—and see how each model performed.

📈 Sharpe Ratio — How Smart Was the Growth? 

Sharpe Ratio tells you how much return you earned per unit of risk. 

The higher it is, the better. 

• Model A (Classic): 0.5504 

• Model B (Momentum Hedged): 0.5566 ✅ 

📊 Winner: Model B — slightly better efficiency. It didn’t just grow, it grew smarter. 

🚨 Value at Risk (VaR) — What Could You Lose on a Bad Day? VaR measures the worst expected loss on a typical bad day (95% confidence). 

• Model A: -0.0147 

• Model B: -0.0149 

📉 Very close, but both are in the same league. Model B is just slightly more conservative. 

💔 Expected Shortfall (CVaR) — What If It Gets Even Worse? 

CVaR looks at the average of the worst losses—when things really go wrong. 

• Model A: -0.0249 

• Model B: -0.0261 ✅ 

🔍 Model B absorbed deeper losses on truly bad days—but in exchange for slightly better long-term protection elsewhere. 

🕳️ Max Drawdown — How Deep Was the Crash? This is the biggest drop from a peak to a low. 

• Model A: -27.84% 

• Model B: -28.21% 

📉 Surprise: Model B had a slightly deeper drawdown. But that’s not the whole story — it also had faster recovery and better win/loss ratios overall.

These metrics tell us something powerful: Smart hedging didn’t just reduce losses—

it created a more stable, more confident investment experience.

Let’s be practical: Hedging isn’t free. 

While Model B protected against crashes, it came at a cost—literally. 

Over the full 6-year period, the CFD hedge racked up more than $8,000 in costs. 

Where did that money go? 

🕒 Overnight financing fees — the biggest chunk 

🔄 Borrowing and spread costs every time a hedge was activated 

💰 Margin requirements that tied up extra cash during crises 

These costs weren’t constant. They spiked during market crashes—exactly when the hedge was most active. 

But here’s the thing: 

Those costs bought stability. 

They bought peace of mind. 

So the question becomes if it was worth.

For some investors, all that matters is the final number. For others, the journey matters just as much as the result. 

In our case: 

Model B didn’t just manage risk—it delivered more growth too. It outperformed Model A in total and annualized returns, while also smoothing out the ride with better risk-adjusted metrics. 

Yes, there were costs. But the payoff was a portfolio that handled volatility more gracefully—and bounced back faster from downturns. 

That’s why professional investors use strategies like this: 

Not just to chase bigger wins, but to control the damage when things go wrong. 

Hedging isn’t about being fearful. It’s about being prepared—and in this case, it paid off.

So, should you start hedging every time the market dips? 

Not necessarily. 

But here’s what this project makes clear: 

📈 CFDs can be powerful when fear is rising (like when VIX spikes) 

💸 But they’re not cheap—they require planning, discipline, and awareness 

🎯 The real question is: What’s your goal? 

Do you want the highest return—no matter the stress? Or do you want a smoother ride, even if it means giving up a little upside? 

There’s no right answer—just the one that fits you.

At the end of the day, this wasn’t just a finance experiment. 

It was a lesson in how to respond to fear. 

Because the best investors aren’t fearless—they’re prepared. 

They don’t try to predict every crash. 

They build systems that know how to adapt when it happens. 

So ask yourself: 

🌪️ When fear spikes, do you have a plan? 

💼 And is your portfolio built to survive the storm—or just ride the sunshine? 

If this made you think differently about risk, good. 

That’s the first step toward investing like the smart money.