Is it time for investors to hedge for a market decline? The pros share their views and strategies
Are markets rising too much, too fast? After hitting a record high earlier this month, the S & P 500 again notched a new closing high — along with the Dow Jones Industrial Average and the Nasdaq Composite. Last week, Goldman Sachs told clients they should start hedging for a market decline . The Wall Street bank cautioned that there are several reasons to think that stocks will fall and the volatility index VIX will spike over the next month. Hedging involves using various strategies to limit risk in financial assets. The VIX is an index that measures expected volatility of the S & P 500 in the month ahead based on the current price of various options contracts. Here’s how Goldman suggests investors worried about a declining market can hedge their positions. Others also believe that it’s time to start hedging — or at least take a more conservative stance. ‘Shift into more value names’ Top hedge fund manager David Neuhauser says it would depend on where investors are positioned right now. “So I do think it’s time to hedge if you’re in an index or you’re in specific companies that have done extremely well this year or even last year,” he told CNBC Pro this week. He said that’s particularly the case given that the strong move in markets on Wednesday meant that the S & P 500 is now at 5,200, “which may serve as strong resistance against a much larger move.” Much will depend on earnings in the second half of this year too, he added. “I think what you want to do is you want to shift from the higher value companies that have done really well over the past year and you want to start to shift into more value names that have not performed,” said Neuhauser, founder and chief investment officer of Livermore Partners. He said many such names are international stocks such as those in Europe. He likes London-listed natural resources firm Glencore , which he says pays good yield and “looks like it’s starting to break out.” On the flip side, he says investors need to question stocks that have done extremely well — such as Nvidia and Arm — in asking how much more they can really move in the short run. “Overall, the markets’ hottest sectors (AI and chips) seem stretched so perhaps small caps start to now play catch up which turned positive [this year] today and had a great day,” he said, naming the Russell 2000 index. “So yes, the short answer is I would think this would be a good time to hedge markets,” Neuhauser concluded. Hedging with options Brian Arcese, portfolio manager and equity analyst at Foord Asset Management, said he’s “conservatively positioned” right now. His strategy involves using options to hedge — the fund’s equity exposure has been hedged through shorting of S & P500 futures and also buying of put options on the S & P500 index. Both of these positions will result in a net reduction of the fund’s equity exposure from 71% to 54%, according to him. In the event of a market selloff, the short index futures and put options on the index will make money, offsetting any losses that might be incurred on their equity exposure. Read more about how options work here. This strategy is suited to more sophisticated investors. Nearly 7% of his fund is allocated to gold, which is a “proper hedge against both volatility and geopolitical risk,” Arcese said. Another 15% goes to cash, including in deposits and money market funds. “Our ability to hold a meaningful portion of the fund in cash in 2022 (a year in which both equities and credit declined), protected significant investor capital,” he wrote in notes sent to CNBC on March 18. The fund has also doubled its exposure to fixed income from the end of the third quarter last year. It’s now at nearly 20% of the fund, and is a combination of high quality and short-duration sovereign and corporate credit, Arcese said. A way ‘much more rational’ than options Portfolio manager Freddie Lait of Latitude Investment Management has “sympathy with the view that the U.S. market in particular is quite expensive,” and says investors may need to think about how to protect their portfolios “to a degree.” But he isn’t a fan of hedging strategies like options, saying “over time you just end up with lower returns.” “So if I felt the market was overvalued, or overstretched … I would move into different parts of the market. It’s the same decision in a funny way – hedging your risk by avoiding your risk. But putting yourself in a position where you can still have great opportunities is, again, I think, a much more rational way to do it,” Lait told CNBC Pro this week.
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