The Hacienda Hedge

When did you do something completely contrary to a popular trend? And then placed a fortune to bet on it and pulled it off?

This is about a country that did it. Not once. But a dozen times.

Oil prices were on fire in 2008. Rates breached the $100 a barrel mark in Jan ’08. After a minor dip in Feb – they charged to $103.05, $111.8, $119.93, $135.09 and in July ‘08 they hit $147.27 a barrel. Insatiable demand, they said. $200 a barrel was striking close.

Exactly at that time, a dozen Mexican finance ministry officials were getting ready to make the boldest contrarian move ever. They fired instructions to their most trusted and biggest Wall Street bankers:

‘We want to hedge our oil price at $87 a barrel’

The Bankers were shocked. The world oil prices were on fire at $147 and here were a bunch of Mexicans quoting put options starting at $87 and going downwards . They salivated. This could be their biggest deal in the season. They booked a record 330 mn barrels from the Mexicans at an average price of $70 to the barrel.

And then the chaos began. The 2009 financial crisis hit. Oil prices began a free fall.

How the Mexicans predicted the worst crisis since the Great Depression, no one knows. But they dared to believe what every wall street banker chose to ignore and backed themselves with a brave contrarian bet.

Oil prices crashed to an average of $55 a barrel in 2009.  

Only the Mexicans sold their oil at $70. And the banks who thought they had the biggest deal, now had to pay out a whopping $ bn 5.03 to Mexico.

Over the next 10 years, Mexico is estimated to have made $163 bn through hedging. No other country could replicate the hedge like Mexico did.

Hacienda gets its name from the historic, rich and ornate meeting hall in the finance ministry where the small group of men and women meet to decide on the hedge.

The Hacienda Hedge, has made it more famous as the world’s largest oil deal that every bank on Wall Street lusts after. And is perhaps Mexico’s best kept secret.

Story Notes:

The fascinating aspect of the Hacienda Hedge is the cloak of secrecy the Mexican government puts it under. In so many years, no one really knows how the decisions are made. Bloomberg did this rivetting piece of investigative journalism in trying to unravel the mystery. You must read the piece to get a much deeper understanding of why Mexico does it - the hard lessons their history has taught them to play this hedge as if their life depended upon it.

Lots of countries tried and failed. Russia aims to emulate the same in 2020.

Even as Mexicans try their best to play the hedge, it is not getting easier with the bankers now more prepared than ever.