These are the excuses professional money managers and risk managers give for not having a hedging plan in place.
- We are still waiting for additional signals to confirm our suspicions.
- An article I read stated that the stock market had more upside.
- We’ll make a decision once the next quarter’s earnings are out.
- I have been managing assets for over 20 years. I know when it is time.
- Profits are not something I want to miss;
- what’s hedging? ;
This last excuse causes my heart to skip an beat every time. This is because professional risk and money managers have either forgotten or never learned the fundamentals of asset management.
Every excuse is valid and I understand the reasons behind them all. The problem isn’t new, and it has been there for as long time as the economy. It is not that everyone can see the warning signs and change course. Or greed can play when the asset manager is determined to make every penny. Street creds can be very valuable in marketing a fund’s return to potential investors. That’s something I also understand.
I have spoken with hundreds of risk managers and asked them the simple question: “After your analysis has concluded that risk levels are rising,” what is your firm’s policy? “I don’t understand.” I pause for a moment to rephrase my question. What steps does your company take to mitigate risk? The usual answer is “well, we do additional analysis.” Then I ask, “Have your firms ever put a hedging plan into place?” I get a blank stare and then ask, “What is hedging?”
These are two issues.
- Falsely believing there is no immediate problem and plenty of time to make more profits. They can easily spot the signs and will take immediate action if necessary.
- The individual or company who is totally unaware of the approaching storm, and they have no other options but to brace themselves and hope for the best.
You would be amazed to know that the first commodity exchanges were established to help hedge commodity risk. It’s quite true. Although hedges are not difficult, you will need to have access to the derivatives markets and a specialist in the field to fully understand the market.
Insurance is not the same thing as hedge.
It is impossible to predict when you will need it. You also can’t control what happens beyond your control. In order to protect you and your property, the prudent person will agree to an insurance policy for a monthly fee. A monthly fee is an affordable option to the high chance of not being able to recover from a disaster.
The same principle applies to hedge. The firm will pay a monthly fee to reduce their risk of an unanticipated event. This can mean a recession in the economy or a reversal of the stock market, which can both be disastrous for a company. Can we predict what will happen in the future? It’s possible. The risk of falling on snow or ice is much higher in winter months. The question is, however, if it will happen in your household or to your neighbor.
It is easy to hedge your risk. Is the economy going to fall into recession? Or will it stay stagnant for the foreseeable future? It will last for 6 months or 24. With more to come, interest rates are rising. Corporate earnings are being squeezed. China’s economy is in crisis and Brexit will likely lead to a recession in the United Kingdom. Are you really going to need more bad news?
Here are some things you should do. First, forget about what others are doing. If you follow the herd you will end up on the same cliff. If you don’t believe you can survive another recession, or if you don’t believe that having to lay off staff is a good strategy, then a professional in derivatives and hedge management might be what you need. Are you unsure where to look? You don’t have to go far because derivatives are not only what we do but all that we do. You’ll be glad that you made the call.
