Managing A Hedge Desk
You've done the setup, you've ticked all the boxes internally and externally, your brokers are chomping at the bit to execute your orders, and management are eagerly waiting to see the results of the hedging program. So what next? Believe it or not, setting up a hedge desk is the easier part of the equation. Running a hedging desk requires extreme attention to detail, and knowledgeable staff who are willing to take on this important role.
One of the main functions of the desk will be to execute hedges given to them either from internal employees (traders/operators), or external counterparts. Making sure that procedures are in place that detail exactly who is allowed to place orders with the hedge desk is extremely important. Executing hedges can often be time sensitive and those on the hedge desk need to know exactly who can price, how much, and when. Failure to have these procedures in place can result in confusion, annoyance, and in the worst-case, losses. Having a reliable system to check that all placed hedges are executed (CSPs, averaging, etc.), all pricing orders are being worked, all pricing confirmations have been sent, these are all part and parcel of the daily management of the hedge desk.
Executing a hedge is usually a one-time action. However, managing a book of hedges and the desk itself, that requires constant adjustments, monitoring, engagement with the physical desks, and opportunities to create additional P&L (if you know where to look). I often say that position management is just as important as trade execution. Whether it's the daily checking of the hedge card to make sure that the company is within the risk tolerances that have been set (see post on the perfect hedge), managing spread cards to ensure that the company is not exposed to backwardations, executing a short-term strategy for tom-next rolls to try and extract profits, or providing reports to management on P&Ls or trading positions. This is by no means an exhaustive list, the role of a hedge desk employee touches almost every corner of a trading company.
Every time a new trade is executed, a physical position is changed, a new business is booked, it has an impact on the hedge desk. Being proactive about position management is key to avoiding unnecessary losses. Hopefully your company will have the systems in place that make for easy monitoring of positions, but staying on top of changing spreads, liquidity, and strategy requires being actively involved with multiple desks. The hedge desk should not just be viewed as a way to execute and enter trades. Companies that treat these roles with the importance they require, are the ones that will see the highest value from the desk.
A hedge desk should be liaising with brokers on a daily basis - per the last post on brokers this is important to glean market information, but you should also be staying on top of your positions. Most companies work with multiple brokers - this is good practice from a risk perspective, but also the more touch points you have in the market the better the information you will receive. This might lead to you needing to cross positions to make sure you are square with all your brokers, this daily dialogue helps prevent last-minute trades that are often where mistakes are made. You don't want to be the client that is being chased down by brokers every Monday prior 3rd Wednesday because you have a long position with one broker and an offsetting short with another, thinking to yourself you are square.
While making sure that payments are made to brokers is not typically a direct responsibility of the hedge desk, its employees will probably be the ones brokers check in with. Any time you know IM or VM lines are near capacity, the hedge desk should be having conversations with the finance and trading departments to make sure all are aware. The traders may be able to price contracts early that reduce credit line consumption, and finance will always appreciate more time to plan ahead for large payments.
If mistakes are made on the desk, systems must be in place to capture them as quickly as possible, record any related P&L, and report them immediately. Mistakes are somewhat inevitable in this fast-paced business but desks should have controls in place to minimize damage and establish procedures to try and prevent reoccurrence. These conversations should be ongoing and are part of running a smooth operation.
After being in the operations department for a couple of years, I was extremely eager to get to the front office and start trading. My mentor at the time strongly advised me to spend some time on the hedging desk before trying to get a trading role. This is probably the best career advice I have ever received. I truly believe that the best traders have spent at least some time in this crucial role. Sitting on the hedge desk allows you to see the business from a completely different angle than you do from the front-office. It is this perspective that enabled me to be such an effective physical trader, utilizing knowledge that I knew some of my competitors did not hold.
