I am a part of the team which is responsible for management and hedging of commodities exposures. Some say corporates are good only in following advice from banks or brokerages. I do agree corporates do not have market insight of a bank. But here is a problem. It is not bank or broker or a hedge fund that has biggest risk that markets will go against them. These guys always have an option to do nothing and wait for a better trading opportunity where as we don't. We have to continue to purchase commodities, spend currencies for daily business. Such company is always exposed to changes to market price even if it decides not to hedge. In fact my company has probably one of the biggest short commodities portfolio in the world. Managing such risk effectively is a challenge. It is like being between a rock and a hard place. You get your behind kicked all the time be senior management, whether it was a missed opportunity to hedge or hedge that turned to be out of the money. Critics will say if you lost money on your hedge then you probably bought it cheaper on physical market. let's face it, nobody wants to loose money, full-stop.

So I do not have an option to do nothing as I am always in the position (short in this case). I think people like me have higher motivation to earn positive return on their portfolio then other players. In fact my intention is to bring hedging to a performance benchmark of proprietary trading.

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Wednesday, August 25, 2010

Who is right, the bulls or the bears?

looking back through my posts I noticed one thing: I do change my mind often. Even though I started writing this post in May I had a few opposing ideas on market direction during such short period of time. Feels like I just cannot make my mind... well, no not really...

Consider this, we have seen the equities market falling by over 50% and then rallying by almost 80%... (funny thing these percentages - even though we rallied more in % terms, we're still lower then when we started). Anyway, so investors are aware that in fact we can do both, fall hard and rally hard. This changes people's mind as they know now that such things are possible. So nobody is surprised by such wild moves any more.

Big swings are common these day and I believe there will be no more panic in the market for the time being and 10% moves either way will be common going forward. Bulls got it right - we see 10% rally and everyone gets excited... we fell 10% - no panic whatsoever. But this is what probably is keeping smaller investors away from the market... small investor that has buy & hold attitude... you just cannot afford these swings in your portfolio. And it is ideal environment for traders as markets remain directional short term and they don't care which way market moves as the can go either short or long.

So I say everyone is right these days, bulls and bears. There is reasonable chance to have both bull market and bear market within a much shorter time frame then people were used to. you just have to choose your side carefully and the most important thing is to be able to switch them.
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