Dynamic hedge management
CASE STUDY

Dynamic hedge management / Passive portfolio 

Dynamic hedge management and passive portfolio balancing are strategies used by commodities companies like copper traders to protect the value of the asset they need to hold to conduct their core business. Because the commodity is subject to significant price fluctuations – price volatility, there is a benefit to trading around that core position. The goal is first to protect the value of the commodity against volatility with a secondary goal of taking advantage of price moves to lock in profit as well.

Because commodities and cryptocurrencies share properties including price volatility, Panxora uses a similar strategy to provide capital management services for its cryptocurrency clients. At present, there seem to be few cryptocurrency companies aware of the untapped opportunity and there have been many that leave their capital totally unprotected and therefore subject to significant drawdowns in value.

The strategy is based on the company looking at its financial obligations and time slicing them into capital required to meet short, medium and long term requirements. The capital needed to cover the ‘short-term’ or next quarter’s operating costs are moved into a fiat bank account or stable coins. Since this money is needed to cover bills, is set aside immediately in fiat as the value of fiat is stable.

The amount of capital required to cover costs for the period from three months to three years is classed as medium-term. Since this cash is not needed for some time it can be actively hedged, giving the strategy time to generate results.

The primary goal in managing medium-term capital is preservation.  A  secondary goal is appreciation when the trading models identify opportunity. The Panxora service uses proprietary AI models to perform this function. By moving capital between designated cryptocurrencies and fiat, the models are able to  minimise drawdowns and take advantage of moves in the value of cryptocurrency.

Finally, business obligations over three years in the future are passively hedged or balanced – kept in a portfolio with a fixed ratio of cryptocurrency to fiat. Every month the account is re-balanced to keep the ratio constant.

When employed together dynamic hedge management coupled with passive portfolio balancing give the best results for limiting drawdowns, but using cryptocurrency price volatility to increase capital as well.

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