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Let's say there's an individual who owns a condominium apartment in a US city, which is being rented out to a tenant. There's still a mortgage owed on the apartment, but there's positive net equity built up in it, and that equity forms a sizable chunk of the individual's current net worth.

For simplicity, let's say that the rest of the individual's net worth is primarily in a 401k account, and the account allows for almost arbitrary investments (any stocks, ETFs, etc, even some low-risk option strategies that do not require margin).

The individual is significantly exposed to the risk that the apartment's value might go down (e.g. due to a real estate market collapse in the US city in question).

Is there some way to make investment choices inside the 401k to somehow hedge against that risk, at least partially? (I would appreciate either a general answer or an answer specific to Seattle, WA being the US city in question).

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Hedging involves taking what is effectively a short position. I'm not aware of any 401(k) plans that allow direct shorting and I don't see you mentioning it, so I'm going to assume that's out.

Real estate risk is rather hard to hedge against anyway. Much harder than market risk. Probably the approach you can reasonably look into is finding stocks that are positively correlated with your real estate market. In particular, look to take a negative position in real estate investment trusts (REITs).

A few ideas come to mind:

  1. Buy an inverse REIT ETF like REK
  2. Buy a put on an individual REIT (or several such) that have lots of holdings in Seattle
  3. I think you can buy put options on the Case-Shiller index. You may even be able to get into the short side of a futures contract

REITs and REIT indices are not going to be a perfect hedge, but at least they are positively correlated with the real estate market.

Please note that I'm not necessarily saying that it's a good idea to use your tax-advantaged retirement account for hedging purposes. I don't think that. I'm just answering your question as well as I can.

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