The Uberization of Hedging - Chatham Financial

Later this month, we’ll be checking out of the grocery store, absently scanning the gift cards hanging by the conveyor belt. “Cheesecake Factory. Ruby Tuesday’s. Berkshire Hathaway. Wait … what?”

But that gift card emblazoned with the moniker of an international conglomerate won’t just be in our imagination, though we’re usually driven to near delirium by the din of holiday shoppers and the insanity of repeated riffs on reindeer. Instead, it will be the work of a new company called Stockpile, which plans to uberize the giving of stocks by offering branded gift cards that represent fractional investments in public companies, funds that track the price of gold, and even fully hedged international real estate ETFs. Gift card recipients will have the option of converting to hundreds of other stocks if they doubt our pick – they will even be able to switch to the S&P 500 tracking ETF, if they don’t believe in idiosyncratic stock selection at all!

As with most industries, the uberization of gifting stock began with frustration about the status quo. Avi Lele simply wanted to send stock to his nephews and nieces, but found it a tremendous hassle to track down their Social Security numbers and other personal information. So he created Stockpile, permitting anyone to gift fractional ownership to anyone, and now even his nephews and nieces (with a parent on the account) can start investing. Hopefully the kids won’t use their option to switch out his safe investment selections for money-burning unicorns, but arguably even that will be a valuable lesson for an uncle to have taught them.

We’re elated by the possibilities inherent in financial asset gift cards, even if it means we’ll always have to double-check the shopping list to see whether we were supposed to buy Coke (20 Liters), or buy Coke (20 shares). And this gets us thinking: isn’t it time to democratize the benefits of hedging? I’ve got a niece graduating from high school next summer, and wouldn’t she toss her cap into the air with greater freedom knowing that her future was suitably hedged with a gift card from her uncle and aunt? Here are a few governing principles we can use to uberize hedging:

1) Purchased, vanilla options only. We do not want to read in the paper that Great Aunt Astrid had to auction off her Dalarna horse collection to cover the negative mark-to-market value on her sold USD-SEK puts. Uberized hedging will be guaranteed safe for the broader public if it applies only to instruments that have no credit component, eliminating swaps and sold options. In fact, the only permissible option will be a purchased option with the premium already paid. Also, we have to exclude double knock-out accreting snowball options or anything else exotic – only healthy options on our hedging gift cards – even though the grocery store will still carry gift cards to restaurants with 2,500 calorie entrees!

2) Fractional notional ownership in hedges between credit-worthy financial institutions. Uberized hedges won’t pit Uncle Bobby against Grandma June, because (see Principle 1) individual hedgers will only take the purchased side of the transaction. Rather, redeemed gift cards will confer a fractional notional ownership in an existing purchased option between participating credit-worthy financial institutions. If participant Bank A purchased a $3 billion dollar floor from participant Bank B, we could pay a $1000 premium for a portion of the floor’s proceeds and gift that to Grandma June. When she redeemed the gift card, she’d own the fractional share of the floor’s proceeds that $1000 could buy, based on its current value at the time of redemption.

3) Great variety in available hedging instruments. Grandma June’s on a fixed income, the real purchasing power of which has been degraded by years of zero interest rates; she could own an interest rate floor to compensate for that. If the CEO of Uncle Bobby’s energy company cashed out all the company’s oil hedges at $80, Uncle Bobby himself could quickly buy some Brent crude puts before the oil price crashed to $40. And since Great Aunt Astrid cannot stop collecting hand-painted Dalarna horses from her native Sweden every year, she could lock in her expenses through buying into a USD put/SEK call. Available hedging variety would be as diverse as the risks it would manage.

4) Independent valuation. Since at least fourth grade, math hasn’t been Uncle Bobby’s strong suit, so he probably doesn’t want to calculate daily marks on his energy hedges. However, Chatham values more than 100,000 debt and derivative instruments every night, with models built by quantitative financial experts, rigorously tested against well-known third-party pricing engines, and validated by all Big Four audit firms for mutual clients at every reporting period. We’d gladly volunteer to value a few more derivatives for family.

Now that we’ve successfully uberized auto transit, dry cleaning, meal prep and delivery, running errands, and gifting stocks, let’s uberize risk management. I can’t wait to see those euro call, Treasury put, and Brent crude call gift cards at the supermarket!