HedgeStreet

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HedgeStreet
Type Private
Founded 2004[1]
Founder John Nafeh, Ph.D.[2]
Headquarters San Mateo, California, United States
Area served United States
Industry Finance
Products HedgeStreet Exchange
Services futures/derivatives exchange
Employees 50[2]
Website http://www.hedgestreet.com/

HedgeStreet was the first Internet-based government regulated (CFTC) event futures/derivatives exchange.[2] The company operates the HedgeStreet Exchange, which launched in October 2004 and provides traders with a place where they can hedge against or speculate on economic events and price movements.[1] The reasoning behind the creation of HedgeStreet was that with the rise of individual private investment in stocks, there might be a similar appetite for individuals to invest in derivatives.[3] This focus on small investors created sufficient confusion that John Nafeh, founder of HedgeStreet, created the term "hedgelet" to help explain the company's business model.[2]

"Hedgelets" come in two varieties: binary options and capped futures.[4] Binary options are bets on outcomes, "yes/no" contracts, that pay out a small dollar amount (e.g. $10) if final price of an instrument is above the strike price and nothing if below. For instance, HedgeStreet launched hurricane contracts in 2006.[5] One type of hurricane contract is based on the aggregate insurance-claims estimate for the entire Atlantic hurricane season; if the estimate exceeds the strike price, the binary options pay out. Capped futures provide a method for profiting from a rise or fall in an instrument's value relative to a specified value, the cap. Unlike binary options which pay out a specified dollar amount, the payout of capped futures is variable. Given a "cap" and "floor" defining a value range, one purchases at a current price. If the price rises, one reaps profit that is the difference between the purchase and final price - up to the cap; likewise for reaping a loss if the price should drop, one's loss limited by the floor.

As of mid-2006, the company had two major investment partners.[2] The Chicago Board Options Exchange purchased a minority stake in HedgeStreet in February 2006 and assists in marketing the company's "hedgelets". In March 2006, Norwest Venture Partners provided a multi-million dollar investment in the company.

In 2007, IG Group announced intent to acquire HedgeStreet.[6][7]

In the beginning of 2008 IG Holdings (based out of the UK) purchased Hedgestreet.

[edit] See also

[edit] References

  1. ^ a b Steven Smith. "Hedging for Small Investors", TSCOptions column, TheStreet.com, 2004-11-25. Retrieved on 2007-12-26. "The site, which launched in early October .... operates as both an exchange and clearinghouse, is a licensed operator, in this case by the Commodity Futures Trading Commission." 
  2. ^ a b c d e Laura Counts. "HedgeStreet has opened up derivatives trade to Main Street", Print Edition, Silicon Valley / San Jose Business Journal, 2006-05-26. Retrieved on 2007-12-26. ""I'd spend the first half of every conversation saying 'no,'" said Mr. Nafeh, chairman of the San Mateo company. "I had to come up with the term 'hedgelet,' so I could explain what it was, instead of what it wasn't."" 
  3. ^ Daniel Nasaw; Ian McDonald. "Firm Offers Hedging on a Small Scale" (Preview), WSJ.com, The Wall Street Journal, 2004-10-22. Retrieved on 2007-12-26. "Now a new online market wants to bring derivatives to the masses, albeit in small doses and not in the speculative form that critics contend can pose financial ruin." 
  4. ^ Jonathan Hoenig. "Hidden Opportunities", SmartMoney.com, Hearst Corporation with Dow Jones & Company, 2006-02-27. Retrieved on 2007-12-26. "Two types of contracts are offered, binary options and capped futures. Both are referred to as "Hedgelets."" 
  5. ^ Adam Shell. "Investors can bet on storm contracts", USATODAY.com, New York: USA Today, 2006-08-24. Retrieved on 2007-12-26. "HedgeStreet is offering two classes of so-called binary contracts, whose values are based on insurance-claims estimates provided by ISO." 
  6. ^ Regulatory News Service. "IG Group Hldgs plc - Acquisition", Hemscott.com, Ipreo, 2007-11-19. Retrieved on 2007-12-26. "IG Group Holdings plc ('IG' or 'the Group') agreed on Friday 16th November to purchase the entire issued share capital of HedgeStreet Inc ('HedgeStreet') for $6.0m, approximately £2.9m." 
  7. ^ Regulatory News Service. "IG Group Hldgs plc - Acquisition Update", Hemscott.com, Ipreo, 2007-12-07. Retrieved on 2007-12-26. 
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