Displaying items by tag: hedging

(New York)

Whenever serious volatility strikes, investors get very nervous and don’t know how to react. One of the big questions is should I stay in the market? The other is which assets should I buy? Surprisingly, there is a fairly simple solution to handle volatility: every time the market moves wildly, hedge your portfolio with cash and/or options. When the markets calm down, unwind the hedge. Returns on stocks have actually been historically strongest during periods of low volatility (not the opposite).

FINSUM: The most interesting aspect here is that studies show that market returns have been highest in low volatility periods. Many people think that you have to stay in the market during volatile periods to make great returns, but that is simply not the case.

(New York)

The end of the bull market could be near, and with that in mind (and really any time), it is a good idea to have a preparation plan in mind. Markets have risen sharply this year, and are back near their peak from 2018, explaining why hedging activity is growing. So how to hedge? Defensive sectors and bond markets are popular, but what about things like options and the VIX? Well, that latter has been diminishing in popularity recently, as the CBOE’s VIX did not respond to Q4’s volatility the way many expected. This has led to claims the market is fixed, and in any case, it has not performed well as an S&P 500 hedge. That leaves S&P 500 hedges themselves, such as 30-day SPX put options.

FINSUM: If you understand and are comfortable with options, use them. If you don’t, stay away and stick to sector and asset class-based hedging.

(New York)

Right now might not seem like the most important time to buy rate-hedged or short duration funds. The Fed is supposed to be on “pause” after all. However, in our view, now might be a critical time to have some rate hedged assets in the portfolio. The reason why is that yields have pulled back strongly from just a couple of months ago, including yesterday, but given the fact that it is almost purely the Fed which has caused the sharp reversal, rates could swing just as wildly higher if their comments, or economic data, changes. In other words, the bond market looks overbought right now because of Fed comments, but it could easily snap back to where it was in December in violent fashion.

FINSUM: We think this is a time for caution on rates and yields given how strongly the market has reversed over the last couple of months.

(New York)

Markets are up since Christmas, but anybody who feels like they are on solid footing is probably a fool. So one of the big questions right now is how to play risky markets? Well, Barron’s has just published a piece outlining what they see as the best funds for such an environment. The picks are based on 15-year performance, including how funds performed during the Financial Crisis. Here are some to look at: AMG Yacktman, Parnassus Core Equity, Invesco Dividend Income, JP Morgan Small Cap Equity, and Neuberger Berman Genesis.

FINSUM: Not a bad idea to look at the funds that have been the best overall risk managers.

(New York)

One of the safe bets during bouts of volatility since the Financial Crisis has been to pile into Treasury bonds anytime things got tough. Every time stocks dipped, the bonds tended to rally strongly and became a safe haven. However, since the recent downturn in equities, this correlation has ceased. Even amidst stock and oil’s plunges recently, Treasuries have basically remained flat, giving no comfort to investors.

FINSUM: The big difference this time around is that the volatility is coming during a period of rising rates, which means Treasury bonds are not as safe a bet as in the past several years.