Macro Risk Checks Which Hedges Actually Work, Which Are Duds

(Bloomberg) -- Investors looking to protect against a potential downturn will want to ensure they have a robust hedging strategy -- though that’s sometimes easier said than done.

“Every drawdown is unique in nature,” according to derivatives and quantitative strategist Maxwell Grinacoff of Macro Risk Advisors in a note Thursday. “Often times in hindsight, what we believed to be a good hedge turned out to be a dud.”

The December 2018 plunge was “arguably liquidity-driven” and equity index protection far outperformed volatility hedges like the Cboe Volatility Index and iPath Series B S&P 500 VIX Short-Term Futures ETN, Grinacoff wrote. The opposite was true in the “Volpocalypse” of February 2018. During the “Taper Tantrum” in mid-2013, credit hedges like the iShares iBoxx High Yield Corporate Bond ETF vastly eclipsed “equity/volatility counterparts” as credit spreads widened and interest rates soared in tandem, he said.

Macro Risk Checks Which Hedges Actually Work, Which Are Duds

Looking at how different assets functioned as hedges during market downturns over the past six years, Grinacoff showed that put options on the United States Oil Fund LP, iShares China Large-Cap ETF and Invesco QQQ Trust Series 1 have had good sensitivity to drops in the S&P 500 on average. Call options on the iShares 20+ Year Treasury Bond ETF and SPDR Gold Shares fund have started to work only this year, he said.

The performance of HYG puts in the analysis is “underwhelming,” but Grinacoff still recommends adding it to portfolios as “many feel the credit complex seems vulnerable.”

“Looking forward, we prefer a blended approach to hedging across assets that may have the most sensitivity to a risk-off, regardless of the genesis,” Grinacoff said.

©2019 Bloomberg L.P.

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