Hedge
Caveat emptor – “buyer beware” – is always a vital cultural trait for asset managers, even if you’re just researching hedging instruments. The danger is not giving it the necessary attention: if it’s a candidate for a spot in your portfolio, be it a long-term investment or a hedge, it must be subject to the same rigorous research effort. This LEX piece on ETF regulation reminds us that even standardized, liquid, exchange-traded instruments can be as opaque as the “darkest” of OTC instruments.
Relatively clueless weekend articles by the Wall Street Journal. This one, ‘Preparing for the next Black Swan’, is downright scary in the number of supposedly “heads I win, tail you lose” hedging/ ‘black swan-proof’ strategies currently pushed to customers – increasingly retail customers on top of the institutional ones. To be clear: we’re all for capital preservation, and our company’s success is built more on the back of risk aversion than of risk-taking. However, the article doesn’t do nearly enough to highlight that hedging instruments or strategies, especially untested ones, have not only flaws (have we already forgotten counter-party risk in 2008?) but most importantly costs, sometimes hidden, and in no way are these costs of a fixed nature. This has all the tell-tale signs of a fad…
