Lingling Wu

Thu, Aug 13

The markets turn. But that doesn’t mean your investment returns have to.

After gaining profit for our clients discretionary investment portfolios in the year to date, the Portfolio Management team of Kylin Prime Capital feels it is prudent to shift their focus towards hedging as we come toward the potential uncertainty, that could unfold throughout the rest of the year, especially bearing in mind the potential minefield of the US election result.


Current momentum in the US market (particularly equity markets) will continue the uptrend momentum if the current President is re-elected, and there would normally be a retracement of equity market if current President fails to be re-elected. Trump has built his entire campaign around the success in the stock markets, making that his primary Presidential focus, regardless of the consequences at a domestic or international relations level. But this does not mean we should just short the market given that Biden has clear leading points against Trump. The impacts and the developments of Covid-19, the continued negotiation of the US government package to aid those in need as well as the economy (stock markets), and the growing geographical tensions, all bring uncertainty to the global market space.


In order to lock in profit (secure gained appreciation on investment), as well as hedge against the uncertainty, the KPC portfolio management team adopted three key approaches in rebalancing the current portfolios. Firstly, we trailed stop loss of Gold (XAUUSD) position to 2038 level, as the team expected there would be a pull back after the yellow metal outperformed over the last few months, making it vulnerable to a correction. Although the position was ultimately stopped out the appreciation whilst in position was significant, making it essential that this return on investment was realised for investors.


Secondly, we took the step to reduce the weight of tech stocks throughout the portfolios.


Thirdly, we added Silver Call Option and Put Spread Option on the portfolio. This gives us the ability to invest at a fixed downside cost, to cadpitalise on volatility over the 4 months, ensuring that we have the ability to hedge against a downside move of stocks should any of the aforementioned volatility triggers significantly arise. The use of a call/put spread allows us to cheapen the price of trade entry to ensure cost effective hedging solutions.   


In March, KPC used S&P straddle strategy, to not only avoid the negative impact from market crash due to spread of the fear of Coronavirus, but also help investors to obtain significant returns even in a period of crisis. However, naturally in the current pandemic environment and ahead of US elections the premium (cost) of equity options has heightened to levels that make tangible gains incredibly expensive. The option spread strategy is relatively cheap to utilise, and it can be constructed to profit in any market (bullish, bearish, and neutral), although its maximum profit is limited. Hence, it is the perfect hedge tool.


The silver call (buy) strategy allows us to look at an upfront cost, that is completely limited in downside (beyond premium), permit us to guarantee entry at a defined and realistic at a date just beyond the election. Giving us the opportunity to utilise the volatility brought by the polls before and the fallout of the result. If you would like to discuss more exact details of this strategy with the team please contact the team who would be more than happy to discuss this with you directly, sharing more exact details of how this works.


After rebalancing the portfolios, investors are in the confident position that the uncertainty over next three months will not erode their previous profit, which is consistent of the overall business strategy of KPC: to deliver steady growing return for investors.