Has anyone ever wondered why the gardening term ‘hedge’ is used in a financial context? The answer is just as simple as it seems. The term was derived originally from a hedge around a field, one that encloses and limits the size of a plot.
Vulpes Investment was calved earlier this year from hedge fund Artradis. As well as more conventional hedge fund strategies, it also plans to offer something that harks back to the roots of hedging, namely the direct acquisition of farms across the world.
Vulpes founder Steve Diggle already owns farm properties in New Zealand (orchards), USA (corn and beans), and Uruguay (sheep and cows). He is also looking into opportunities in Africa, specifically with regard to cash crops such as coffee, cocoa and tea. Plus he is also tinkering with the idea of growing tobacco, but remains undecided on that.
He has been buying farms for several years, and has a plan that Vulpes could acquire a sizeable and scalable portfolio if outside investors share his vision and $100 million could be accumulated as a farm investment fund.
He’s not a farmer by trade, of course. But as an investor he has been active in the sector and says he has a good track record.
“I find [and incentivise] people with the skills in the farming business, and I can create a structure with the legal, compliance and risk management features that an investor expects from a fund management firm,” he says. “I have found that high-net-worth investors react well to my having skin in this game, and the endowments and pension funds like the time horizon that agricultural businesses require.”
We often ask hedge fund managers the question: “How do you risk-manage this thing?”
For this farm thing, Diggle elaborated on the methods he has in his risk management tool-shed. Firstly there are the obvious futures and options markets, which always had the purpose of allowing producers to lock in prices for their output, long before financial whiz-kids got their hands on them and messed around with unproductive price speculation.
Secondly, hedging is helped by exotic derivatives, such as weather derivatives.
Thirdly, increased fertiliser costs can be hedged in part by taking a long position in fertiliser manufacturer stocks. Fourthly, in the emerging markets, there is the potential risk of asset seizure (for Zimbabwe farmers, for example). That risk can be mitigated by sovereign credit default swaps.
On the brighter side for farmers in the third world, the availability of information is revolutionising the small farmer’s life. With price information available instantly and cheaply via SMS, it makes life harder for extortionate middlemen trying to persuade a farmer to accept an off-market price.
Price transparency is making farming a fairer marketplace for farmers than they have had for eons.