Hedge Funds Should Hege

By May 14, 2019 Blog

For those of you who have been following this blog, you know we have been wringing our hands about the level of the market, particularly the market for high flying technology stocks, for some time.  One of the reasons for our concern is that when companies are priced to perfection small cracks can lead to be drops, even for major companies.  Take Intel, for example, which is hardly a profitless startup.  As of today, it has dropped more than 25% from its high in two weeks. Needless to say, the IPOs of both Uber and Lyft have been disasters for investors who bought at the offering price.  To be sure both Uber and Lyft are innovative, exciting companies, but it is just such companies for which enthusiasm can lead to overpricing.  That is why we have been using options, particularly on high flying technology companies with large implied volatilities, to hedge risk in our clients’ portfolios.  It is ironic to us that the term “hedge fund” has become associated with aggressive speculation.  At Cornell Capital we design personal “hedge funds” for our clients with emphasis on the traditional meaning of the word hedge – taking positions in securities like options that will do well when times turn bad.  And the higher the level of the market, the more options we write for our clients.  Admittedly during periods like the first three months of this year as prices move to perfection, our clients will lag, but that has all been made up in two short weeks.  In our view, hedge funds should hedge.

That does not mean, however, that everyone should hedge in the same way.  As market prices move toward “perfection” levels, we do think all our clients should hedge to an extent, but not to the same extent.  Investors differ in their goals, their risk aversion and their tax status.  All those factors influence what the appropriate hedge is for a given investor.  That is why we develop personal hedge funds.

Leave a Reply