Investments in technology companies can be some of the most profitable with new developments nearly every day. Companies all over the world are changing how we accomplish daily tasks, manage our finances, and spend our free time. With a hand in nearly every aspect of life, it is clear why they are so profitable. As any financial advisor will tell you, it is important to have a well-rounded portfolio. As a shareholder of a technology company, it may seem like an impenetrable position to be in, especially with fintech and AI at the top of everyone’s investment radar, but that is not the case. In this article, we will cover why developing hedging strategies is important for financial success.
What is Hedging?
Before we look at hedging strategies, we must first look at why we need a well-rounded portfolio. With any portfolio, there exists an amount 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.
One well-known risk management technique is hedging your portfolio. When we hedge a portfolio, we utilize certain investments to protect individuals from unwanted price changes or market crashes. It is sometimes viewed as a type of insurance. Knowing what kind of hedge investment works best for you take knowledge of your current investments and the markets they belong to. This may require the help of experts and portfolio managers. Alpen Partners is fully equipped to assist our clients with this critical risk management step. Hedging is frequently utilized as a risk management technique but is often considered a higher-level strategy. It’s recommended to seek the guidance of an expert before overwhelming yourself with a specific strategy for your situation. We do, however, have basic advice to give. Below we lay out some common hedging strategies.
Hedging Strategies for Shareholders of Technology Companies
Below are basic ideas of hedging strategies that are popularly utilized to protect a portfolio concentrated in shares of tech companies. In hedging, these are commonly used terms and techniques. Two keywords you may find when researching hedging strategies are options and futures. Let’s take a look at those and more.
- Options- This kind of financial derivative involves a contract between the option writer and an option holder. Under this contract, a buyer has the option, but is not obligated to buy or sell a security or asset at a certain period of time or at an agreed-upon price. Many believe that options are for those who are unsure of their chosen stock and need to hedge; therefore, you shouldn’t make the investment. Others, however, say that hedging is useful no matter what. With options, you have the benefit of lowering your downside risk.
- Futures-Futures are the most common financial derivatives used to hedge a portfolio. This 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 will state the quality and quantity of the asset and offsets the risk exposures and helps individuals avoid being affected by any price fluctuations. Unfortunately, it is impossible to avoid risk completely, so neutralizing the risk is the ultimate goal with futures contracts.
- Shorts- A short hedge protects an investor against the risk of a declining asset price that could occur in the future. A short involves shorting an asset with a derivative contract that protects from the potential loss by selling the asset at a fixed price.
- Investing in Currency- Investing in currencies allow an investor to protect themselves from the fluctuating value of one currency against another one. Investors often purchase currency through ETFs or the forex market. Countries like Switzerland have stronger economies, and therefore their currency is worth more and can protect individuals from volatile international markets. If you are new to currency trading, there are many mistakes that can be made. With the help of an advisor who is well versed in the art of trading currencies, you can choose transactions that will benefit you safely. Trading on the forex market can also be used to protect yourself from volatility.
- 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 sounds nearly identical to a futures contract, there are some key differences. For example, a forward is a private transaction while a futures contract is reported to the futures exchange. Additionally, forwards are almost unregulated.
Hedging Strategies with Alpen Partners
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. Shareholders of both listed and privately held technology companies count among our clients. No matter your goals, our team is dedicated to ensuring our clients have strong portfolios that turn dreams into a reality.