Sea of Noise

Fri, 18 Jun 2004

Hedging For the Venture Investor

Wharton reports on a forthcoming paper by Bill Hillard and Charles Baden-Fuller entitled "Should a Venture Capital Fund Act More Like a 'Venture Hedge Fund'?" The authors suggest that venture investors can increase their rate of return by taking short positions that relate to their venture portfolio:

Typically, successful venture capital-backed companies act as disruptive forces in their industries. The freshly-conceived products or services they promise to bring to the market threaten the entrenched position of an established competitor, causing any publicly-traded rival's stock price to decline. In that situation, a put option . . . acquired on the competitor's stock would be a tool to capture profits that are in addition to those obtained from sales of the new product or service, the two authors say.

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