To hedge equity exposure without buying or selling shares of stock or rebalancing the portfolio, a risk manager can use derivatives. One effective method is:
* Short Total Return Swap (TRS) Position: By entering into a short TRS, the risk manager agrees to pay the total return of the equity (including any dividends and capital gains) to the counterparty, effectively offsetting the exposure to the equity's performance. This allows the manager to hedge the risk without having to liquidate any holdings or reallocate the portfolio.
* Avoiding Portfolio Rebalancing: This method avoids the transaction costs and potential market impact of rebalancing the portfolio through buying or selling actual shares.