12 Effective Ways to Hedge Against Interest Rates in 2024 & Beyond

If you aim to build a profitable investment portfolio, you need a solid interest rate hedging strategy. 

That’s because the Federal Reserve Bank keeps changing interest rates, and this can affect your returns.

So, what is interest rate risk? How do you hedge interest rates?

Let’s explore everything about interest rate risk and whom it affects. You’ll also discover how to hedge against interest rates by investing in fine wine through Vinovest and exploring other options.

What Is Interest Rate Risk, and Whom Does It Affect?

Interest rate risk refers to the possibility that fluctuating interest rates will reduce or increase the value of an asset. It mainly affects bonds and other fixed-income securities.

When the interest rate rises, the value of a bond or other fixed-income investment declines. 

Why?

That’s because the rate being paid on the bond is now lower than the current market rate. 

However, the value of these assets could rise during lower interest rate periods.

Meanwhile, an interest rate hike also affects equity investors, but less directly than bond investors. That’s because companies’ cost of borrowing money increases when the Federal Reserve Bank increases the interest rate.

This means companies might postpone borrowing - which could result in less spending. Consequently, the decrease in spending could slow down business growth and decrease stock value.

Now, interest rate risk management can help you limit uncertainty and build a profitable investment portfolio. So, let’s check out the various ways to hedge against declining and rising interest rates.

How Do I Hedge Against Interest Rates? (12 Best Options to Explore)

Here’s how you can hedge against interest rate volatility in 2022:

1. Invest in Collectibles Such as Fine Wine

Investing in collectibles like fine wine and precious metals is a great interest rate hedging strategy. Bear in mind that fine wine is less volatile and carries less risk than most collectibles.

Also, fine wine usually outperforms traditional stock indexes like the S&P 500. According to Liv-ex (a fine wine trading platform), the value of fine wine grew by 36.8% from 2020 to 2022, while the S&P 500 appreciated by only 27%.

Here’s a fun fact:

On average, wines in Vinovest portfolios produced a 5.59% return on investment in the first quarter of 2022. At this pace, the annual expected returns should amount to around 22.36% by the end of 2022.

Wondering how you can invest in the world’s most sought-after wines?

Head to the Vinovest website today! This platform makes it easy for you to buy, store, and sell investment-grade wines from all over the world.

Here are the benefits of investing through Vinovest:

• The platform sources your wines directly from global wine exchanges, wine merchants, and wineries. So, it offers you the finest wine bottles at the best possible wholesale prices.
• It charges you a 2.5% annual fee (1.9% for a portfolio above $50,000.) This covers wine buying, wine selling, authentication, full insurance, storage, and portfolio management.
• It safely stores your wines under perfect conditions in a bonded warehouse.
• And, more! Visit the Vinovest website to know more!

2. Invest in Short Duration Stocks

Investing in short-duration stocks is a brilliant way to hedge against rising rates. Simply put, the “duration” of a stock refers to the average time taken until the stock’s cash flow is received.

So, when interest rates rise, stocks with a more immediate cash flow (shorter duration) tend to deliver high returns.

3. Buy Hedged Bond Funds

Some assets from the fixed income market also make it easy for you to hedge against rising rates. In simple terms, the fixed income market refers to a market that trades fixed income securities like corporate bonds, treasury bills, and government bonds. 

Now, you can tackle interest rate risk by investing in interest rate hedged corporate bonds such as the iShares Interest Rate Hedged Corporate Bond ETF.

4. Buy TIPS

Treasury Inflation-Protected Securities (TIPS) are US Treasury bonds that rise in value during an interest rate hike. So, investing in these fixed income securities can be a great way to tackle interest rate exposure. 

One of the best TIPS to invest in is the SPDR Barclays TIPS. 

5. Buy ETFs

Exchange-Traded Funds (ETFs) can also help investors offset the effects of a lower or higher interest rate. ETFs are investment funds that invest in a basket of bonds, stocks, or other assets.

The Quadratic Interest Rate Volatility & Inflation Hedge is an excellent ETF worth adding to your portfolio.

6. Explore Embedded Options

Using embedded options is also a great way to hedge against interest rates. An embedded option gives the issuer or the bondholder the right to take a specified action against the other party.

Some of the excellent embedded options include call and put options.

A call option allows you to sell a security whose price is expected to fall. Meanwhile, a put option lets you sell a security at a predetermined price within a certain time frame.

7. Use an Interest Rate Cap

An interest rate cap is a policy that limits how much interest you can pay on a floating rate loan. As a borrower, it protects you from paying a higher interest rate on your loan. 

8. Use Interest Rate Floors

Interest floor rates are some of the best interest rate derivatives. A floor rate is the minimum rate a financial institution or any other lender charges on a floating rate loan.

Interest rate floors usually help lenders avoid the risk of loss during lower interest rate periods. So, this option could be worth exploring if you’re a lender and not a borrower.

9. Use Interest Rate Collars

Collaring involves simultaneously buying an interest rate cap and selling an interest rate floor (or the other way around.) So, this option could help you hedge against fluctuating interest rates.

10. Use Forward Rate Agreements

A forward rate agreement helps you lock in an interest rate and avoid paying higher fees in the future. With this option, you agree to pay a fixed interest rate to a financial institution on an agreed-upon date in the future.

11. Buy or Sell Interest Rate Futures

Buying or selling interest rate futures can also help you hedge against declining or rising interest rates. 

Simply put, an interest rate future is a futures contract that lets you buy or sell an asset at a predetermined price in the future. You can buy or sell this futures contract on platforms like the Intercontinental Exchange (ICE) Futures Europe.

12. Use an Interest Rate Swap

A swap is one of the best interest rate derivatives that help tackle interest rate exposure. With an interest rate swap, you agree to exchange interest payments over a certain period of time.

For example, if you have a loan with a floating rate, you can swap the floating rate for a fixed rate. From there, you’ll start paying the fixed rate (called the “swap rate”) instead of the old variable rate.

The most common type of swap is the vanilla swap. It involves exchanging fixed interest rate payments for variable interest payments on the same notional amount.

Hedge Against Interest Rates By Investing in Stable Assets Like Fine Wine

Interest rate hedging isn’t complicated - as long as you focus on the right products and investments (such as fine wine, Treasury bonds, and more.)

But if you seriously want to hedge interest rates and other economic downturns, then look no further than fine wine investment!

Visit the Vinovest website today to start putting your money into investment-grade wine bottles. This platform helps you buy, store, and sell the best wines from all corners of the world.