Investors Are Spending Fresh Billions Hedging Market Mania
Comment of the Day

June 22 2020

Commentary by Eoin Treacy

Investors Are Spending Fresh Billions Hedging Market Mania

This article by Yakob Peterseil for Bloomberg may be of interest to subscribers. Here is a section:

Gold and longer-maturity bonds are getting outsized inflows. Protective equity options are outdrawing speculative contracts, while volatility markets are positioning for fresh disruptions.

It comes as signs of froth are emerging. The S&P 500 Index is on the cusp of its best quarter in more than 80 years even as fears of a second coronavirus wave grow. Speculative mania reigns among retail investors, while the likes of JPMorgan Chase & Co. are turning bullish on U.S. stocks.

But for all the fears that Wall Street is running headlong into risk in one of the fastest rebounds ever, hedging demand shows the frenzy is being met with some vigilance.

Eoin Treacy's view

When equities yield 4% and a 10% correction is normal, then hedging with bonds that yield 6% and have less volatility makes sense. It is the relationship risk parity strategies were based on even though the original numbers were different. However today we have equities that yield 2% with 30% drawdown risk. Bonds yield 0.7% but volatility hit decade highs, more than double current levels, just a couple of months ago.

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