2020 has been a turbulent year for economies across the globe, due in large part to the coronavirus pandemic and the interruptions it caused to businesses and major world economies. Yet despite such upheaval, MansaX by Standard Investment Bank was still able to deliver annualized returns of 23.3% to its investors in the first nine months of 2020, and is set to match its FY’2019 results of 24% by the end of the year.
How is it possible to earn such returns amidst market turbulence? Well, it can be chalked down to the fund’s trading model, which includes strategies like going long, going short, hedging and leveraging.
It may sound complex, but these are actually straightforward strategies employed by traders and fund managers across the globe. In fact, the treasury departments of commercial banks also use them to make profits.
So what do these terms mean? Let us explore below.
Hedging is the practice of investing to reduce the risk of adverse price movements in an asset. Hedging generally involves taking an offsetting position in a related security. Basically, since fund managers cannot prevent certain price downturns, they take positions that protect the fund in the eventuality that the downturn happens.
To hedge successfully, fund managers use a range of tools strategically to offset the risk of adverse price movements in the market. Derivatives are used to protect shares or even entire portfolios. The three most common risks derivatives are used to hedge against include foreign exchange risk, interest rate risk and commodity/product input hedge.
Diversifying a portfolio to reduce risk can also be considered a hedge.
2. Going Long vs Going Short
An investor who has taken a long position on a stock has bought and owns that stock i.e. he/she has paid the full cost of owning the stock. On the other hand, if the investor has taken a short position, he/she owes that stock to someone but doesn’t own it yet. Usually, a short investor borrows shares from a brokerage firm. Then, with the hopes that the stock price will fall, he/she buys the shares at a lower price to pay back the broker.
Long and short positions are applied to leverage income on a security. Long stock positions are bullish because they anticipate growth whereas short positions are bearish. The position taken depends on the market position at any one time.
Leveraging is the practice of using borrowed capital in order to multiply the potential returns from an investment. Fund managers leverage their investments through various tools including options, futures and margin accounts.
While leveraging can be profitable, it also increases the underlying risk of an investment, meaning that it must be used along with other risk management strategies to protect capital.
As seen above, these investment strategies, applied by experienced traders, help to generate returns for a fund regardless of market movements. When used along with asset diversification and other sound risk management practices, investors are able to earn returns that are worthwhile without taking on an inordinate amount of risk.
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