Hedging
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November 18, 2022
What it means
Before we know why and how you can hedge, let’s dive into what it even means. Portfolio hedging is a strategy used to reduce the risk of unfavorable price movements or market crashes for a given asset. This is a strategy every investor should know. In simplest terms, hedging is like insurance. Hedging is done to make sure investors are still in good standing in the event of something terrible happening. It can’t prevent anything wrong from happening, but it can make sure the negative hit isn’t too bad. This is similar to when you buy car insurance. It won’t stop you from getting into an accident, but if you do, you aren’t left entirely helpless. The process of hedging is not as simple as paying an insurance company periodically, however. By paying a monthly fee, you can’t protect your returns. It’s going to take a bit more thought and planning than that. With the help of a portfolio manager, individuals and corporations use hedging techniques to reduce exposure to risks. Investors make one investment to hedge another, by strategically using instruments in the market to offset risks of unwanted price change. The risk that investors are protecting themselves from is market volatility. Because of both systematic and unsystematic risks, markets are falling and rising constantly. With a diverse portfolio, an investor is protecting themselves from a market that may not be doing as well. Remember, the goal of hedging is not to make more money. It’s to protect yourself from losses. The cost of a hedge is unavoidable. You could either be paying the cost of an option or lost profits from being on the losing end of a futures contract. Because of this, some things could go wrong, and it is important to be aware of the risks of hedging – just another reason an advisor is highly recommended for this financial planning step. How to Hedge Your Portfolio To properly hedge a portfolio, it is highly recommended that investors rely on the help of a portfolio manager. It is considered an intermediate-to-advanced financial topic, but it is a topic that an investor who is serious about returns should be aware of. Techniques involve derivatives, complicated financial instruments, through options and futures. Hedging with Options A contract between the option writer and an option holder is the financial derivative known as options. Under this contract, the buyer can, but is not obligated to, buy, or sell a security or asset at a certain period of time or at an agreed-upon price. Hedging with Futures A future is a contract that says the buyer has to purchase an asset, or the seller has to sell an asset at a predetermined future date or price. A futures contract states the quality and quantity of the asset.Diversification
According to Modern Portfolio Theory, diversification is one of the cornerstones of a successful portfolio. Diverse portfolios outperform a concentrated one. By owning a large number of investments in more than one sector or asset class, investors can protect themselves from unsystematic risk, the risk that one encounters when investing in one particular company. If there are 12 or more stocks in a stock portfolio, unsystematic risk is almost entirely eliminated. Systematic risk is always lurking, however. By investing in non-correlating assets, you can protect yourself from volatility. Non-correlated asset classes are investments like bonds, commodities, currencies, real estate, fine art, and cars. The non-correlating assets fight volatile markets because each asset class reacts differently to changes in the markets. You will find that there will be times when one asset is not performing well, while another may be thriving. Investors who keep this in mind receive a balanced return and skip the highs and lows of a poorly performing market.Alpen Partners Opinion
To get the most out of your investment, and to protect yourself from systematic and unsystematic risk, hedge your portfolio with the help of Alpen Partners . We are well equipped to guide you and help you choose what kind of investments would work best as a hedge. The period of 2009-2018 will be looked back upon as one of the longest bull markets for stocks in history. Credit markets have also had an unprecedented run since central banks started their many quantitative easing programs and are now offering record low yields. Real estate, art, classic cars, and essentially every other asset class have also increased sharply in value and are now showing signs of bubbles. 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. Our focus will be on shorting a number of companies that will fail in the future credit crisis, either by shorting their stocks directly or buying long-dated put options. The record low volatility that we have been experiencing over the past 18 months represents a unique opportunity to build such a short portfolio. All investments involve certain risks. All investments carry the potential for financial loss, including the loss of the principal amount invested. Past performance should not be viewed as an indicator of future results. Market conditions and broader economic factors can significantly impact the value of investments. Investments in international markets are subject to additional risks, such as currency exchange fluctuations, political or economic instability, and variations in accounting practices. Alternative investments, including but not limited to hedge funds, private equity, and real estate, may be illiquid, speculative, and are not suitable for all investors. The above information should be considered before making any investment decisions. All posts and publications are for your information only and are not intended as an offer, promotion, or solicitation to buy or sell any financial instrument or perform any other financial transactions. All information and opinions expressed in posts and publications reflect our current views as of the date of the publication and may be liable to change without notice.Author
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