Author Topic: Liability Hedging  (Read 1309 times)

zoro

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Liability Hedging
« on: August 01, 2017, 07:47:05 AM »
Does anyone practice liability hedging on part of their portfolio. I know an old school pension fund manager in the UK and they would allocate assets in the fund to match the liabilities that the retirees were likely to face. So for a part of my portfolio i started to do the same thing. it might not be the mathematically optimum thing to do but i find it reassuring somehow.

For example over my life i will be buying oil and gas for the car. therefore i have an existing large short position in oil,therefore buying oil stocks with dividends that are a function of the price of gas and oil hedge some of the risk out. i.e. oil up - gas expensive - but dividends up, oil down - gas cheap but lower dividends.   I can cross worrying about the price of oil or the price of my oil stocks off my list in retirement.
you can go through you portfolio and try to match the assets you have to the liabilities you are likely to have in the future for all kinds of categories of expense.

VoteCthulu

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Re: Liability Hedging
« Reply #1 on: August 01, 2017, 04:36:44 PM »
Sure, I participate in the market as a whole and own the market as a whole.

I don't see any reason to get more particular than this, otherwise I'd have to own far more Amazon and Little Ceasars stock than I'm comfortable with, and I'd miss out on all the great returns from tobacco and epi-pen manufacturers.

waltworks

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Re: Liability Hedging
« Reply #2 on: August 01, 2017, 09:28:53 PM »
$7 million net worth, trying to "hedge" his use of gasoline for his car...

You can't make this stuff up.

-W

farfromfire

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Re: Liability Hedging
« Reply #3 on: August 01, 2017, 11:22:20 PM »
$7 million net worth, trying to "hedge" his use of gasoline for his car...

You can't make this stuff up.

-W
Apparently someone can..

zoro

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Re: Liability Hedging
« Reply #4 on: August 02, 2017, 11:23:33 AM »
the first rule of investing is not to lose money. liability hedging matching can be a pretty reasonable strategy to remove specific risk, for no extra cost.
i dont see the problem?

VoteCthulu

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Re: Liability Hedging
« Reply #5 on: August 02, 2017, 12:51:49 PM »
If the liability is significant, yes. If you're an airline that lives and dies by the price of fuel, hedging is a must.

If you have a million dollars invested and spend $200/year on gas, then hedging probably isn't worth the effort.

ChpBstrd

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Re: Liability Hedging
« Reply #6 on: August 04, 2017, 03:10:58 PM »
This seems counterproductive for a mustachian because:

(a) we don't buy many consumer products that comprise a huge part of the economy such as luxury SUVs, McMansions, cable, fast food, soda, boats, name-brand toilet paper, tobacco, lawncare, etc. Not to mention business or government services, IT infrastructure....etc.

(b) We tend to buy low-margin things like fruits and veggies, tools, bikes, no-brand clothing, and energy. However, the economy probably has a higher % of high-margin transactions, such as Starbucks lattes, fashion/decor, and $3 cell phone games.

c) investments in who we buy from are not really hedges for what we spend. The hospital chain, insurance company, brokerage, utility, etc. do not care if you are a stockholder - the price is the same. Your shares in Anthem do not affect your health insurance premiums. More to the point, their shares don't necessarily go up if the price increases. Healthcare prices, for example, are driven by rising costs, not so much rising premiums.

AccidentalMiser

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Re: Liability Hedging
« Reply #7 on: August 04, 2017, 03:32:20 PM »
the first rule of investing is not to lose money. liability hedging matching can be a pretty reasonable strategy to remove specific risk, for no extra cost.
i dont see the problem?

How do you hedge your risk at no cost?  There is no free lunch.  If you're short oil company stock and oil rises, you'll pay more for gasoline AND your short oil company stocks will rise which will cause you to lose money there, too.

Perhaps I just don't understand your dividend strategy but I've been buying and selling stocks, commodities, and options for the last 30 years and have a finance-heavy MBA.

Please elaborate...

zoro

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Re: Liability Hedging
« Reply #8 on: August 06, 2017, 09:32:06 AM »
So hedging at zero cost is possible because different assets have different value to different stakeholders. This principle is discussed quite well from a value investors perspective Martin Whitman's "The Aggressive Conservative Investor", and is another reason why efficient market theory is wrong.

In the example I outlined simply by being a driver over my lifetime I have a large short position in oil. I know that I will be putting gas in the car every week.  I can reduce that short position by riding my bike more or offset the short position that exists becxause of my future demand.

I'm not smart enough to know if gas will be cheap or expensive, but if I essentially buy it forward by buying an asset that is correlated with gas prices, I cancel this risk out for no extra cost than if I had bought a less correlated  asset like an s&p index fund.  In a sense I am a better purchaser of the asset than someone with no car as it has more value to me (here is the free lunch)

Outside of the stock world the example may be clearer I also have a huge short position in toilet paper
If Costco has a deal on toilet paper I can go long twenty cases and put it under the bed, the long position cancels the short and I am no longer exposed to the variance in toilet paper prices.

Hargrove

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Re: Liability Hedging
« Reply #9 on: August 06, 2017, 12:30:45 PM »
This is manufactured worry.

There is no such thing as zero cost when time is money. I am never going to hedge against gas prices, nor, certainly, toilet paper. An outrageous success with this would not be worth half the time spent on it.

The money you spend on a regular basis is almost completely irrelevant to the stock market. Directing your assets to tweak miniscule proportions of your own spending does not seem like a reasonable strategy when the worry-free alternative is to enjoy the returns of the world's market via an index portfolio, which will make wildly more than you could ever have frittered away on toilet paper.

Get it? Frittered away? Ah ha ha.