Derivatives are financial instruments which are often considered complex and very specialized. Because of this, the use of derivatives in private wealth portfolios may seem like a frightening prospect.
Well, no longer. Our front office system eXimius can really help to manage derivatives and give a hand to get MiFID II compliance about depreciation reporting.
Derivatives: It’s All About About Hedging
You all know what hedging means: At the cost of giving up potential upside, either fully or in part, derivatives enable full or partial protection against downside losses by creating short position that can cover unpredictable events.
eXimius fully supports the creation and valuation of short derivative positions so that they can be used for hedging or specific investment purposes. In addition, insights can be provided in the total amount of long and short positions for a certain category to identify the total value of the long and short legs of the investment portfolio.
While investing in derivatives can be used for hedging, using them to invest in underweighted segments can also provide additional dimensions in a portfolio. By using derivatives, a traditional investment portfolio can be further diversified.
Risk-parity investing is one of many methods which allows portfolios to increase diversification by using leverage via derivatives. Risk-parity investing aims to allocate assets to a more diversified portfolio with a higher risk-reward trade-off than a traditional investment portfolio. This can be achieved by introducing leverage to increase return expectations on low risk segments while derivatives are used to generate additional exposure in a cost-efficient way.
Modelling and Rebalancing
Model portfolios are a strong tool for comparing the content of an investment portfolio to the model it is supposed to follow based on the risk appetite of the investor. A model portfolio can be viewed in eXimius, and used to compare asset class exposures or for rebalancing exercises based on either liquidation value or gross and net exposure.
Another way of managing a derivatives investment portfolio is by rebalancing it against a model portfolio. This process is based on realigning the weightings of the instruments in an investment portfolio to the weights defined on a specific target model portfolio. Rebalancing is a powerful tool to keep the leverage level under control and to maintain the portfolio strategy. eXimius eases this process thanks to its exceptionally clear visuals and representations.
Waiting for Leverage
eXimius has got some more good trick in its sleeve, indeed. We’re going to cover them soon in a new article. Thanks for reading!