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Comment by DenisM | Hacker News Reader

Recession could be hedged with stock options, no? At their scale they will get custom-tailored option product to match their liabilities.

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it'll be super expensive to hedge -- the higher the volatility of the underlying asset (here, the number of people who pay for a desk or whatever), the more valuable/expensive an option on that asset is. but I also don't think it makes a ton of sense. in effect, WeWork would reduce their cash flow growth, with payments going towards hedging. their entire pitch is that they are a fast growing company, which justifies an insane multiple, any hedging would reduce that risk.

you don't hedge against decreases in demand via financial instruments, instead you: 1. hedge against decrease in demand through diversification of services; if wework sells some property management software (for example) then that might be more recession-resistant than their actual leasing business. 2. hedge against decrease in demand through long-term contracts: getting IBM to sign a 10 year lease (for example) is usually a safe bet that you'll have a tenant through the recession; on demand hot desks are much less safe 3. hedge against cost increases using financial instruments: most corporations doing hedging are hedging against commodity price changes, e.g. airlines buying oil futures or mcdonalds buying beef futures. similarly, wework might buy kombucha or aluminum cup futures, but there is no derivatives market for on-demand desks :)

of course, there are different perspectives on this. matt levine has a really interesting column about the different philosophies of where diversification belongs, at the corporate level or at the investor level: https://www.bloomberg.com/opinion/articles/2019-04-09/ceos-l.... my finance classes were relatively recent so you might be able to tell my bias.

Patent post suggested drought of renters due to a recession. Recession can be hedged against by purchasing e.g. 12 months options that are far enough out of the money to be cheap yet close enough to cover a major recession event.

I don’t know if the math adds up, but I think it deserves studying.

I’m not looking to hedge against all kinds of customer flight with an instrument, that’s clearly foolish as you noted. But particular events can be hedged.

what underlying asset would you buy the options on? if it's just on the overall market, then what advantage is there for wework to do that versus an individual investor?

I have made a long reply to a sibling comment.

The cost of consistent recession hedging is prohibitive and larger than the benefit you’d receive, because of arbitrage (if it was cheaper than risk, you could invest risk free).

See: https://www.aqr.com/Insights/Research/White-Papers/Pathetic-...

If you could hedge a recession, we’d have no recessions :)

Hedging only works if you have short time durations (eg you wanna hedge specifically in October, because you have a big bill due then), or if you’re the one providing the hedge and capturing the Volatility Risk Premium.

I'm not looking for a blanket hedge though.

"We Work" can have a built-in cushion against smaller recession events - long-term leases, being able to predict which percentage of short-term leases will dry up, cash reserves, some sort of counter-cyclical lease agreement (e.g. with repo companies), counter-recession marketing/education/etc program (e.g. "let's beat recession together by sticking together!" or some such).

Where the hedge is coming in is making sure that the company does not end up upside down if recession hits harder than the built-in cushion can absorb. They could be buying 12 month S&P500 options on a rolling basis - buy a new batch every month as the previous batch expires. The idea is not to get paid each time SPY drops 5% down, but to get paid when it drops 35% down signaling an actual market crisis and have enough time/money to survive the hit.

I don't know if it makes sense as I'm just making this up as a I go, but your criticism is selling the idea short. Ahem.

Hedging via options is guaranteed to cost more than the benefit you’d receive, over the long run. This is due to the volatility risk premium (the insurers against risk must be paid, and will price it to come out ahead).

See https://www.aqr.com/Insights/Research/White-Papers/Pathetic-...

But no, you cannot hedge away risks of a recession - for cheaper than what a recession would cause.

It is not free or magic to do that.

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