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Whitepaper

Concentrated Equity Risk Management: Hedging Recent IPO Exposure

February 9, 2022
There are times when institutional investors find themselves with a concentrated exposure to single-name equities. The source of this concentration is often an allocation to venture capital (VC) and private equity (PE). The frequency of this “problem of the riches” has grown in recent years due to the following factors:

  • Institutional investors have increased their allocations to PE and VC.
  • Similar to public-equity markets, PE and VC have exhibited robust
    performance in recent years, with many portfolio companies evolving
    into publicly listed stocks.
  • Managers have been extending their holding period of fund investments
    relative to historical averages. This includes holding investments in the fund
    well past the restricted date post-IPO, when positions were typically
    distributed to the end investor.

  • Thanks to these factors, investors have found themselves with outsized exposure to a highly appreciated, concentrated equity position. The positions are often large enough to create a significant amount of idiosyncratic risk in the broader fund. Investors must evaluate a series of trade-offs and considerations to determine which risk-management solution may be the most appropriate for their circumstances.

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Clint Talmo, CFA

Director, Investment Strategy

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