Managing of Concentrated Position

CFA Level III
#1

Hi, may I understand the difference between the techniques employed in managing concentrated positions in publicly trade shares?

Under (1) Equity Monetization Tool Set, for the following 4 techniques listed below, how is it different between those and (2) Lock In Unrealized Gains: Hedging?

(1) Equity Monetization Tool Set

  1. a short sale against the box,

  2. a total return equity swap - Isn’t this a form of hedging as well?

  3. Forward conversion with options (collar). - Isn’t this a form of hedging as well?

  4. a forward sale contract or single-stock futures contract. Isn’t this a form of hedging as well?

(2) Lock In Unrealized Gains: Hedging

There are two major hedging approaches investors can consider:

  1. Purchase of puts

  2. Cashless, or zero-premium, collar

#2

And what is the issue if same instruments may be used for hedging as well as for monetization of illiquid asset or for speculative purpose? I am not sure I understand your query?

#3

The intent of the author is in #1, remove the specific stock exposure and replace it with something else. In hedging, the intent is more of insurance against downsides only (hence the puts).

#4

Thank you both Flashback and CMLSML for your replies. I think I understand better after seeing your replies. I was confused by the mentions of collars in both (1) Equity Monetization, and (2) Hedging. After reading your replies, I understand that the ‘collar’ strategy mentioned under (2) Hedging was for the purpose of reducing the cost of insurance.

That is different from the collar under (1) Equity Monetization.

Thank you.

#5

Going to CMLSML’s point, in this particular instrument:

" a total return equity swap - Isn’t this a form of hedging as well?"

it is a clear instrument to manage concentrated positions for international investors, as one can swap his illiquid position to returns of indices abroad, for instance…

#6

Recall the basic definition of a hedge is to remove both upside and downside risk and if possible earn the risk free rate of return. CMLSML above said it well that a total return equity swap does not eliminate price risk. Total return swaps have lots of possibility for risk. As an example:

Volume 5, Reading 28 Risk Mgt of Swap Strategies, Section 4.4 page 385 for concentrated positions and reducing insider exposure