Hedging Strategies Can Reduce Investment Losses

Hedging Strategies Can Reduce Investment Losses
Financial losses suffered by investors because their broker
failed to recommend an appropriate hedging strategy can be
recovered. There are literally thousands of "typical" or
traditional hedging strategies that stockbrokers utilize,
or in some cases fail to use. There have also been numerous
reports that brokers at times misuse hedging strategies.

In general, hedging strategies look for a "spread" between
market value and theoretical or "true" value and attempt to
extract profits when the values converge. As hedging is a
strategy designed to minimize exposure to unwanted risks,
while still allowing a portfolio to profit from investment
activity, it is an important aspect to investing. It is
highly recommended that investors discuss the use of
hedging strategies with their stockbroker from the onset of
any investment.

One common hedging strategy is the investment in a security
a broker believes is under-priced relative to its "fair
value". This investment is then combined with the short
sale of a related security or securities. By "playing both
sides", it does not matter whether the market as a whole
goes up or down in value, only whether the under-priced
security appreciates relative to the market. This strategy
is often referred to as a "speculation in the basis," where
the basis is the difference between the security's
theoretical value and its actual value.

Some stockbrokers fear that by suggesting a hedging
strategy to a client the concept will tarnish their
professional reputation. However, it has been proven over
time that if the basic strategies are fully explained to a
client that most clients want to minimize their risk, not
add risk.

Given that appreciation rates for equities, the last twenty
years have been well above long-term averages, most
investors are open to the concept of transferring price
decline risks to others, if the strategies, including costs
and fees are appropriate.

Many brokers who have clients with taxable portfolios do
not consider hedging strategies for several reasons.
Concerns include the time commitment, the complexity of the
issue, and the fear of what other people, including the
client or other advisors, might think of a stockbroker who
recommends hedging strategies.

Some brokers believe that many clients are not financially
sophisticated enough to make informed decisions about
hedging strategies and therefore claim those concerns are
the reason they did not recommend a risk management
approach.

Ignorance on the part of the broker and inaccurate
perceptions by others are not valid reasons for
stockbrokers to not recommend that their clients include
these legitimate risk management tools as a part of their
portfolio strategy. Investment losses that occur because a
broker failed to recommend an appropriate hedging strategy
to a client may be able to be recovered.

Under defined duties and regulations, stockbrokers or
dealers are required to recommend "suitable" investments
and strategies to clients. In addition, investment
advisors, who have more stringent fiduciary duties and
standards, are obligated to seek investments and strategies
that are in the best interest of the client. Risk
management is a key component of investment strategies.

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Visit LegalView's homepage at http://www.LegalView.com to
learn about other legal issues such as the Chantix recall
or the Baxter Heparin controversy. Or, for more information
on failure to hedge, visit http://hedge.legalview.com/ .