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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Friday, May 14, 2010

end of the week note

Nobody is perfect and has to have a vacation from time to time, so please accept my apologies for silence.

Would anyone buy commodities in this environment? I agree that people forget bad news very fast. But memories do remain hidden somewhere in our brain. And for me it is a 'Déjà Vu'... I never try to look too far back and the only thing I know that extensive dollar rallies had never been good, it is a litmus paper of fear in the market.

And I don't think I will ever be able to understand it. I will leave it to smarter people to understand and explain (did anyone try to count the number of explanations of what is happening right now?). One part of me says 'hey, looks like growth in the world is sustainable', the other one, the one that is sometimes called subconsciousness part of the mind tells me to back off from making bullish calls on the world. And I also have a feeling that it is not only sovereign problems to blame for recent sell off.

Banks keep on calling and suggesting that it is a good opportunity to hedge. Well, may be... But what are the risks of going long now? Some time ago I read Michael Covel's book about Turtles. Anyone can be a trader and make money if you have systematic approach to trading and positive expectations for your success. You do not even have to understand what is going on, just follow the trend. I think this should be applicable to hedging strategies as well. And I do not have positive expectations for going long commodities. I say 'do not piss against the wind' (this is a literate translation of Russian proverb), you will not make money betting against the trend.

And looks like trends are about to change. Let's have a look at it over the weekend. So next time expect some heavy charting slang and lots of numbers... have a good weekend.
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