A portfolio manager in Boston runs a $500 million mutual fund. The fund's characteristics are:

1. 60% equity, 40% fixed income
2. The equity is mostly midcap value.
3. The fixed income is mostly "Baa/BBB" 8 year corporates

His analyst forecasts the following:

1. The S&P 500 will decline by 4%
2. The Federal Reserve will increase interest rates by 75 basis points
3. The average credit quality of the portfolio will deteriorate resulting in a spread widening of an additional 20 bps

To hedge to portfolio, the analyst and porfolio do the following:

1. Fully hedge 60% of the $500M with S&P 500 equity futures.
2. Fully hedge 40% of the $500M with Tbond futures

You have been recently hired as a derivative risk manager and have been asked to comment and critique the sutuation.