Strategic Hedging: A Pillar of Effective Risk Management

Risk is part of any investment. Learn how to effectively manage risk from this informative presentation from Dolat Capital, held at PMSBazaar Bengaluru Conclave.

29 May 2024
Strategic Hedging: A Pillar of Effective Risk Management

The speaker at the conclave was Sheetal Kubadia, Director – Head of Products, Dolat Capital and she presented on the topic: Strategic Hedging A Pillar of Effective Risk Management. 

Sheetal Kubadia divided her presentation into five sections, explaining strategic risk management, the importance of hedging, drawing cues from global hedge funds, the role of hedging in portfolios, and lastly Dolat Absolute Return (product) LLP.

Kubadia began by discussing strategic risk management, emphasising that risk management is not about eliminating risk but rather managing and mitigating it. Traditional risk management involves diversification across asset classes, product diversification, and country diversification.

She then explained how derivatives have played a vital role in risk management through hedging. She discussed how certain asset classes fulfil needs during inflation and how hedge funds have been used globally for over 4-5 decades. She provided an example from the COVID-19 era when most asset classes underperformed, illustrating how hedge funds can provide leverage to support upside and protect in downside market scenarios.

Kubadia elaborated on the Dolat group, highlighting its six-decade existence and role as a market maker. She proceeded to discuss absolute return funds, explaining why someone should choose absolute return strategies, especially given the current scenario of stretched equity valuations. She briefly outlined Dolat Absolute Return Fund's approach, structure, and resources, including its investment strategy, returns, volatility, annual capital protection, technology, structure, time horizon, and liquidity.

Regarding strategy positioning, the focus is primarily on options arbitrage, with two main investment strategies: market-agnostic and market-related strategies. These strategies are further divided into cash future arbitrage and option arbitrage under the market-agnostic strategy, long-short strategy, and index strategy under the market-related strategy.

Kubadia also discussed the fund's beta and alpha compared to the market and benchmark, as well as how risk is managed, including daily, weekly, and monthly monitoring parameters. She concluded by summarising the fund's characteristics.

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