Glencore: Hedging Strategy

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As a Glencore shareholder, it is understandable why an individual would feel they have a strong portfolio. As one of the world’s largest commodities producer and marketer, based in one of the world’s most economically secure countries, Glencore is positioned for years of success. According to the Glencore annual report, the company is one of the world’s largest globally diversified natural resource companies. They employ nearly 158,000 people and have 150 mining and metallurgical sites, oil production assets, and agricultural sites globally. These sites produce over 90 commodities within three major business segments; metals and materials, energy, and agriculture.

While there is much promise as a shareholder, nothing is guaranteed.  It is important for Glencore shareholders to create a well-rounded portfolio to protect against various risks. In this article, we will examine how hedging will protect your portfolio and how Alpen Partners can help.

What is a hedging strategy?

Is hedging really necessary? Glencore has proven to be a strong company year after year, yet we encourage shareholders to consider hedging strategies. The answer is yes. A concentrated portfolio has proven to underperform against diverse portfolios. Hedging strategies allow investors to combat risk head-on. No matter how strong a company is, there exists a level of risk. With a risk management plan, investors examine the kinds and levels of risk they are facing and selecting the right investments to combat their risk profile. Knowing what your risks are and the best strategies to avoid them, plus what to do when you encounter them, can set you up for success. When creating a hedging plan, investors work with advisors to make the right type of investments that fight against the presented risk profile. Some investors view hedging as a type of portfolio insurance.

Hedging a portfolio is considered an intermediate to advanced investment strategy, so call on the help of economic experts is a typical action for investors. These experts are well versed in markets, types of risk, and are willing to examine your complete portfolio to produce the best results. It’s recommended to seek the guidance of an expert before overwhelming yourself with a specific strategy for your situation. Alpen Partners is fully equipped to assist our clients with this critical risk management step. While professional guidance is highly recommended, we do layout some basic hedging vocabulary below. Keep in mind there is no perfect hedging strategy, and not all of these may apply to every portfolio.

Hedging Strategies for Glencore Employees

Here we have summarized popular hedging techniques that are used by investors of all kinds. They are used by investors who have placed all of their capital into a single company or market. The first two strategies, options, and futures are two of the most commonly sited hedging strategies. We will take a brief look at these and more.

  • Options- An option is a financial derivative or financial contract between a writer and a buyer. The option buyer has the choice but is not obligated to buy or sell a security or asset at a certain period of time or at an agreed-upon price. Some believe options are for those who are not sure of their chosen stick and need to hedge; therefore, you shouldn’t make the investment. Others, however, say that hedging is useful no matter the circumstance.
  • Futures- Futures are probably the most commonly used financial derivatives for hedging.  A future is a contract similar to an option, but the buyer must purchase the asset, and the seller is obligated to sell an asset at the predetermined price or date. The contract states the quality and quantity of the asset and offsets the risk exposures and helps individuals avoid price fluctuations.
  • Shorts- A short position is a technique that guards an investor against the risk of a declining asset price that could occur in the future. In this technique, an investor sells a security with the intention of buying it at a later date. The investor does so when they believe the price of the security is set to fall in the short term.
  • Forwards- This is a derivative where two parties may choose a fixed exchange rate between two currencies now for a date in the future. The contract is settled on the predetermined date, and the amount of one currency will be exchanged for a specified quantity of the other currency in question. While this is seemingly the exact same as a futures contract, there are some key differences. A forward is a private transaction while a futures contract is reported to the futures exchange. Additionally, forwards are almost completely unregulated.

Hedging Strategies with Alpen Partners

Alpen Partners has decided to offer its customers the opportunity to hedge their portfolios through the use of naked shorts and long-dated put options. Using one of the leading institutional trading platforms in the world, we offer our clients the ability to build a portfolio that will take advantage of the upcoming downturn of the credit cycle and/or hedge their current long exposure. Using the derivatives specialists of our partner banks, we set up hedging strategies that protect Glencore employees’ shareholdings and give them some flexibility in terms of liquidity.

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