Borrow, Hedge, or Sell?

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  • Post last modified:January 4, 2016

Volatile markets can be a trying time for portfolio managers. There are many solutions out there to help cope with large swings in stocks, bet few solutions have the same benefits as stock loans.

Hedging solutions, like stock or index options are viable, but without an expertise in implied volatility, greeks, and exceptional timing…options can be a risky proposition. Options can look like a theoretical hedge delta wise when they are put on, but it is common to actually end up losing money, due to the mean reverting nature of implied volatility and theta decay, amongst other factors.

Overwrites solve these two issues specifically, but this strategy actually caps the
max gain of the investment…the opposite of what investors try to do.
Selling a position is a viable solution if the fundamental story has changed. In these cases, it is important to remember it takes time for a thesis to play out.

Growing impatient can be hazardous, for it only takes a day to get a takeover bid or for a positive research report to come out and boost the stock. Attempting to sell and buy back stock around macroeconomic events or
global volatility is likely the riskiest solution. Market timing and active asset allocation has been proven to lead to inferior returns in multiple studies, including Dalbar’s Quantitative Analysis of
Investor Behavior (QAIB) report.

Stock loans are likely the best liquidity solution for investors and portfolio managers. While interest rates are on the rise, they are still near historic lows (up 25bs to be exact). Now is the optimal time to consider stock for cash transactions. Investors keep all the upside, receive capital to fund short or medium term liabilities, and pay a nominal interest rate based on the
quality of stock used to finance the loan. Stock financing is very common for large Wall Street investment banks. This strategy is now available to self directed investors and smaller firms worldwide.
Squadron lending focuses on stock loans across geographies…so there is no home bias. Clients can leverage Squadron’s capital and expertise to find an optimally priced transaction.