Financial losses suffered by investors because their broker failed to recommend an appropriate hedging strategy can be recovered. There are literally thousands of "typical" or traditional hedging strategies that stockbrokers utilize, or in some cases fail to use. There have also been numerous reports that brokers at times misuse hedging strategies.
In general, hedging strategies look for a "spread" between market value and theoretical or "true" value and attempt to extract profits when the values converge. A strategy that is designed to reduce exposure to risks while enabling a portfolio to have a gain from this activity is known as hedging. It is highly recommended that investors discuss the use of hedging strategies with their stockbroker from the onset of any investment.
One common hedging strategy is the investment in a security a broker believes is under-priced relative to its "fair value". The short sale of similar securities or security is combined with the investment. By "playing both sides", it does not matter whether the market as a whole goes up or down in value, only whether the under-priced security appreciates relative to the market. Speculation in the basis is when the basis is the between the security's actual value and its theoretical value.
Some stockbrokers fear that by suggesting a hedging strategy to a client the concept will tarnish their professional reputation. Although, most clients wish to reduce risk when it comes to their investing strategies after the basic strategy is explained.
Given that appreciation rates for equities, the last twenty years have been well above long-term averages, most investors are open to the concept of transferring price decline risks to others, if the strategies, including costs and fees are appropriate.
Many brokers who have clients with taxable portfolios do not consider hedging strategies for several reasons. Concerns include the time commitment, the complexity of the issue, and the fear of what other people, including the client or other advisors, might think of a stockbroker who recommends hedging strategies.
Some brokers believe that many clients are not financially sophisticated enough to make informed decisions about hedging strategies and therefore claim those concerns are the reason they did not recommend a risk management approach.
Ignorance on the part of the broker and inaccurate perceptions by others are not valid reasons for stockbrokers to not recommend that their clients include these legitimate risk management tools as a part of their portfolio strategy. Losses that are incurred because a stockbroker did not offer the most suitable hedging strategy may be able to be recovered.
Brokers are required under regulations to suggest and offer suitable strategies to their clients. Additionally, an investment advisor is required to offer investments that are in the best interest of their client. They are required to do this under fiduciary strategies and standards. Part of the strategies that go along with investment include risk management.
