What Is A Hedge?

A hedge is a position taken in the financial markets for the purpose of protecting against an unfavorable move against ones’ portfolio. The term “hedge” can be used in other contexts but I bring this financial usage to your attention because of the unfortunate absence of its deployment generally speaking by individual investors.

When the typical Canadian makes his/ her annual trip to the bank for transferring funds into the RRSP fund, the banker who really doesn’t know much about investing simply cycles the money into mutual funds. There’s no reason for the banker to do any differently because typically the portfolio holder knows no different either. Banks are in the business of not losing you money because they wish to retain your business. Mutual funds are convenient for them because they can rely on diversification through a professional fund manager. The trouble one encounters is back end fees, mangagement fees and “over-diversification”. Yes, being over-diversified has the effect of dumming down returns.

In my accounting practice, I frequently remind my clients to spend a couple of hours per week delving into financial education while learning about stock market investment opportunities. I believe that nobody is more concerned about your net worth and your retirement than you. Hence; you need to be in charge and fully accountable to your own financial growth.

Now back to hedging. You may have heard the terms “inherent risk”, “systemic risk”, and “geopolitical risk”. They are all fancy terms akin to abstract art and I’m certainly not going to spend time expounding upon the ultimate essence of their meaning. However; I am going to refer to the ever present matter of monetary stability and its lack thereof as a good reason in itself to be “hedged.”

First world countries have become more and more indebted. You thought the U.S. was bad. Well, in the U.K. every man, woman, and child owes some other country $127,000 USD. It kind of puts all the fuss around Princess Kate in perspective.  While the English pander to the residents of Buckingham Palace and obsess over pregnancy rumours, each and every Englishman, Scot, Welshman, and Irishman wake up to a future of financial bondage.  Per capital, the U.S. is at a mere $58,200 per citizen.

Here’s what’s weird….there’s really no record of reconciliation of these debt obligations with creditors available in the public doman. You see….governments issue debt instruments like bonds and treasury notes in the context of their borrowings so one would expect to see these all accounted for by a reporting body such as the International Monetary Fund (IMF). Hence; the settlement of such instruments and the creation of new ones could be viewed with transparency.

What about gold? Does gold still play a role in the creation of debt instruments? Well, no. However; countries around the world still view gold as a financial instrument. It used to be the case in the U.S that the production of a dollar bill could only be undertaken by assigning a gold unit concurrently. This is no longer the case since the Nixon administration. Fractional reserve banking today does not utilize gold as a variable in the production of new money.

What has been the reaction by the IMF in a culture of debt proliferation? Well, they created their own monetary unit called the “SDR” (Special Depository Right). It’s reasonable to derive that the unit was created in the context of currency mismatches, unreconciled debtor/ creditor accounts, and imbalances in sovereign gold reserves. Could the SDR become a material talking point in place of rumours around Kate’s next “baby bump”? I’m not certain that that populous has the appetite for reality TV to go along with milk and morning corn flakes.

Hence; you might learn more about hedging and what it can do to protect your portfolio.