I’m a bit confused between the two concepts- hedging and monetizing. I know the fundamental difference. Hedging is to protect against downside and monetizing is borrowing against position. What confuses me is that strategies like equity forward sale contract is called a monetizing strategy but actually it’s a sale-just in future-what’s the difference?
a true sale will trigger a tax liability. which is something you do not want esp. with a concentrated position because you have it on your books at a very low cost basis. (And sellign something that has appreciated quite a bit) will cause a tax liability.
monetize - use any one of the many strategies to convert your position into a cash position (without triggering the tax liability) and then use the proceeds obtained to diversify and reduce your concentrated position. You are possibly also deferring the tax impact and reducing the tax impact to later on.
- Tax impact is not immediate. is the major difference.
- additionally it provides you with the funds now to diversify your position - so you can chip away at your concentrated position.