Protecting Your Business Value (if you Aren’t Already Bill Ackman)

Peter Harrigan
Testudo Fortis Labs
3 min readMar 28, 2020

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Can you figure out how to do it?

On March 25th, 2020, Pershing Square Management released a letter to investors. In that letter, they revealed that they had hedged themselves, quite effectively, against the decline the markets recently suffered. While many hedge funds were writing painful letters to investors, or avoiding writing letters at all, this one was probably fun to write.

The hedges put in place by Pershing had cost $27 million in premiums and commissions. At the date of the letter, Pershing had closed out the positions for a gain of approximately $2.6 billion. According to the investor letter, these gains offset all the losses Pershing’s portfolios had suffered. And, with a pile of new cash, the firm was able to acquire new investment at bargain basement prices. Not bad for a few weeks.

Knowledge and Access

The instruments Pershing employed in their hedge were, to put it mildly, sophisticated. They purchased protection on various credit indices, both investment grade and high yield. Is that something you or I can do?

Assuming you saw the danger to markets from the Coronavirus, could you protect yourself the way Ackman’s firm did? First, you would need the knowledge of how to execute such trades. You’d need to identify the indices he used and the time frame. Given the returns that were generated here, roughly 100–1, the credit protection purchased must have been relatively short-term. If not, the premiums paid would have been higher. So, the execution and timing must have been close to flawless.

Second, if you had the knowledge, would you have the access? These contracts are traded between financial organizations that have a signed ISDA master agreement in place. So, for most of us, no. There are other instruments out there for the rest of us. You could buy puts on ETFs or on stock index futures. (Personally, I made some well-timed if woefully inadequately sized put purchases.) But you most likely do not have access to the best instruments. And, if you are a small or medium sized business hoping to hedge against risks to the price of what you produce or sell, you’re pretty much out of luck.

A Practical Solution?

At Grey Swan, we have been developing a model that would bring the benefits of top level knowledge and access to everyone.

Our solution is highly intuitive. It is visual, employing the sort of drag-and-drop technology we are all familiar with after spending decades on the Internet. And it is incredibly simple.

It is bounded and safe. All solutions have a predetermined costs and end points.

It is easy for financial providers to launch trading in new indices. The tech is asset agnostic and does not care what you trade. So fields that have no options for price protection can be addressed easily and cheaply.

The Solution in Practice

Imagine you are a medium-sized business exporting a product. Let’s pick something simple for our example — call it steel. This is not to suggest steel production is simple, but at least I can visualize it.

You are concerned that the price might decline. This would represent a loss on all the inventory you own. Further, it would mean a reduction of future revenues, revenues you need to pay employees, rent, insurance, and any other of your firm’s fixed costs.

On the platform we’ve been building:

  • You draw a simple curve.
  • The curve shows how much payment/compensation you would receive if the price of steel dropped to various levels.
  • You submit that curve for a quote.
  • You get back a simple price you can pay.
  • You execute the trade.
  • You sleep well at night.

Decisions at the Edges

Why is it important that firms can hedge? First, as this current crisis so clearly illustrates, we cannot rely on centralized authorities to maintain a safe, steady environment for business. They never really could. Risk gets around them. Second, hedging provides information to the market. When someone hedges, it affects prices a little. When a lot of people hedge, it moves prices more. This information can provide valuable feedback to markets and suppliers as they decide how much and when to produce.

Ultimately, we need to push information and the ability to act to as many people in our economy as possible. Then, they can protect themselves, which is far more effective than relying on centralized organizations to save us.

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Peter Harrigan
Testudo Fortis Labs

CEO and co-founder, Grey Swan Digital. Co-founder, Sentient Technologies. Former trader at CME, Pacific Exchange.