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March. It can be done intraday. It is costly for the long-term as it requires monitoring, but it’ s good for the short-term.”
Investing in currencies like the yen may also be more palatable given that the implied volatility— and therefore cost— on these currencies is much lower than on stock options, making these a potentially affordable hedge for any future corrections. The yen, for example, strengthened by 2-3 % while stocks markets declined by 6-8 % in the early February sell-off as investors were drawn to its safe-haven status, backed as it is by Japan’ s current account surplus.
The dollar is also seen as a useful hedge moving inversely to equities in times of stress. AGI’ s Mader believes that as an overall and permanent portfolio component the dollar can indeed be a useful diversifier to equities— though less useful as a short-term hedging tool.
“ What we are advising is that you shouldn’ t look at currencies like the dollar as a hedge because you can’ t be sure this works as a risk management tool— in the Bernanke tapering episode markets went down and so did the dollar. You should think of the dollar as a strategic investment. It helps optimise risk— not just for hedging but as a diversification tool in the overall allocation,” says Mader.
Gold has long been the traditional safe haven asset for investors in times of crisis, however Morgan Stanley’ s report showed gold to be one of the poorer performers in the last sell-off. Indeed, the precious metal tends to be more of a hedge when all assets are crashing— a crisis backstop rather than volatility protector.
“ Volatility is back in the 14 % to 15 % range and it won’ t go away. The idea is straightforward – we expect no more multiple expansion.”
- FRANZ WENZEL, INSTITUTIONAL SOLUTIONS STRATEGIST, AXA INVESTMENT MANAGERS
“ Gold is something that our family office clients hold— it can be up to 5 %,” says Mader.“ But the idea here is not hedging but rather holding an asset of last recourse. You can also hold the Swiss franc for this, or Canadian and Singapore dollar. It’ s to protect against bigger meltdowns. These assets are for emergencies.”
Morgan Stanley also posited oil as a potential diversifier away from US equities, as its relative cost remains low
48 // TheTrade // Spring 2018