Single stock hedging techniques for volatile markets.
During a time of global unrest, such as the Coronavirus pandemic, investors should not forget their portfolios. With so much economic uncertainty, now is the time to ensure our portfolios are strong enough to withstand the constantly changing economic situation. Experts are saying the events happening around Coronavirus may make the biggest financial impact since 2008. Stock prices fell, and many individuals who have a concentrated portfolio were left with worry as the global crisis has no end in sight. When we hedge a portfolio, we utilize certain investments to protect individuals from unwanted price changes or market crashes. In this article, we will look at what it takes to protect a concentrated portfolio from the downfall of a single company’s downfall.
Whether there is a global pandemic threatens our economy or not, portfolio hedging is an essential part of achieving the wealth plans you have set for yourself. It is a strategy that skilled investors use to reduce the amount of risk they are subjecting their portfolio to. When an investor only invests in a single stock, they are open to risks of all kinds. Their entire wealth plan rests on the success of a single company. When that company hits hard times, the value of an investor’s asset hits the floor. In times of economic uncertainty, such as the one we face with Coronavirus, many companies are beginning to see a market slowdown, while others are staying strong. For example, companies like Amazon and Zoom, a communications application, are thriving due to the need for services that offer people the ability to stay home while staying stocked with supplies and working from home. Having stock in a slowing company will not seem as bad when a portfolio is successfully hedged.
Hedging is a strategy in which an investor uses instruments, often derivatives to offset unwanted price change. The primary purpose of portfolio hedging is not to make more money. It is to protect an investor from inevitable market changes. While there can be added costs to this strategy, it does not compare to the price an investor pays when their concentrated portfolio runs into a failing market. Hedging can also help with tax issues and liquidity.
Now that we know why it is important to hedge your portfolio, we will look into some of the hedging strategies that have allowed investors to find success during trying times. Not every strategy is going to work for you and your portfolio, so it is always recommended to seek the advice of skilled professionals to find which strategy is going to work best for you.
Collars- A collar is a strategy that consists of limiting the price risk of a stock and allow the investor to benefit from further appreciation up to a certain value. It protects an investor from significant losses but also does not grant significant gains. The investor can even borrow against a concentrated equity position. One collar, known as an equity collar, is a strategy where an investor purchases a long-dated put option on a concentrated stock holding combined with the sale of a long-dated call option.
Exchange Funds- Exchange funds are a great way for an investor to hedge their single stock portfolio without triggering capital gains tax, which will happen if they sold shares. With an exchange fund, the investor will contribute stock to an LP or LLC, and in return, they get partnership units. This grants the investor a shared ownership fo the securities in the fund. Exchange funds are typically only offered to qualified purchasers, which often means the investor must have a net worth of at least $1 million.
Investing in Thriving Markets- If you are paying close attention, there are markets that are thriving from the economic activity right now. Streaming services, services that deliver household needs, work-from-home services, and many more are predicted to offer high returns. Work with a financial advisor to choose the investment that will work best to meet your needs.
With all of this in mind, portfolio hedging is a strategy usually performed by intermediate to expert investors, so while we can offer basic guidance if you are serious about protecting your portfolio, we recommend reaching out to our expert team. Contact information can be found below.
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 the derivatives specialists of our partner banks, we set up hedging strategies that protect our clients’ holdings while giving them some flexibility in terms of liquidity. 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.
No matter the problem, Alpen Partners will handcraft a solution for you. We know that there is no one-size-fits-all when it comes to financial success. Our approach involves working with our clients to make a unique plan to meet their needs. Rest assured that we will work hard to guide you through the process of meeting your financial and personal goals.
Contact us to enhance your financial plan today.