One of our Ultra High Net Worth clients with a very large single stock investment was looking to hedge the existing investment to protect their portfolio.
/ The challenge
Due to a rally in the share price, our UHNW client wanted to hedge their existing large single stock investment. The aim was to protect its downside by giving away part of the upside on the stock.
With the client’s stake in the stock representing a substantial portion of their wealth, despite them continuing to see further upside potential in the share price, they were conscious of the downside risk of holding a concentrated equity position in a stock that had rallied significantly and was now trading at its all-time-high.
The client was seeking financing to diversify their wealth into other assets including private investments and to repay an existing margin loan facility.
/ Our solution
Working closely with the client to understand their existing position and what structure they wanted, Capital Code consulted the client regarding the terms with three of the client’s existing private banking providers. In doing so, the client was able to execute a funded collar trade, allowing them to take some money off the table for other investment opportunities without a margin call risk and at the same time, hedging client’s single stock position.
As part of this transaction, we finalised the ISDA documentation, negotiated long form documents with the bank and the client’s lawyers and to review reporting obligations such as EMIR and SFTR. In addition, as part of the transaction the bank had borrowed the shares from the market to hedge their delta position. We also assisted the client to amend the collar trade and moved the borrowing of the shares for the bank from market borrow to client borrow (where the bank borrowed the shares from the client) in order to reduce the cost to the client.
/ The result
This solution met the client’s objective of hedging a portion of their economic exposure to the stock while maintaining upside exposure to the call strike. The structure also provides the benefit of no or minimal premium payment in respect of the downside protection.
Within a few months of this transaction being completed, the equity markets came down and the share price reduced substantially. If the client had not hedged his position, they would have erased all the gains made on these shares over the years. Our efforts enabled the client to protect their portfolio and overall net worth.
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