HEDGING HEALTHCARE LIABILITIES USING A MEDICAL CPI WEIGHTED PORTFOLIO OF HEALTHCARE STOCKS

The purpose of this paper is to find a suitable investment strategy to hedge against anticipated and unanticipated changes in medical inflation. These changes pose a challenge to individuals and businesses where medical liabilities play a significant role in an entity’s life. There have been many attempts to create a suitable investment strategy to hedge the surprise changes such as: shorting AAA Corporate bonds and investing in health care mutual funds. However, none have been successful in creating a suitable and successful hedge. In this paper, we are exploring the possibilities of creating a value-based portfolio weighted according to Medical Care Index components to hedge against anticipated and unanticipated changes. After running the regression, we are confident that our portfolio and individual ETFs have no significant correlation with Medical Care Index as well as the Consumer Price Index (CPI). Therefore, using the common stock as a hedging tool is not efficient. For future studies, one can create a balanced portfolio of equities, fixed income, and alternative investment to try to hedge against Medical CPI.