HedgeStreet

HedgeStreet

HedgeStreet is the first Internet-based government regulated (CFTC) event futures/derivatives exchange. 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. 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. 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.

"Hedgelets" come in two varieties: binary options and capped futures. 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. 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. 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.

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

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