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compared to other assets, although others disagree about the
viability of oil as a hedging tool.
“We came across it but usually in declining prices it will
also trigger issues for the portfolio,” says Mader. “Oil has a
“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.”
- WOLFGANG MADER, CO-HEAD OF RISKLAB, ALLIANZ GLOBAL INVESTORS
knock-on; firstly on emerging markets and then you’ll see
impact on non-emerging, potentially with a different sign
attached. Again, it’s not a hedge because it would be a bet on
correlations.”
Excessive exuberance
While hedging is no doubt a concern for buy-siders, rushing
into diversified assets is not the correct approach, say
analysts. In reality, the February sell-off was somewhat ex-
aggerated by the involvement of VIX-linked exchange-trad-
ed funds selling down equity positions, exacerbating the
volatility spike.
Wenzel says that gauging market volatility has to be done
on a dynamic basis: “February’s sell-off was a result of irra-
tional exuberance. The inflation figure shocked the market.
I think some of the irrational exuberance has been washed
out, but for the future the tools need to be calibrated. You
don’t want to sell or hedge at every spike.”
According to John Bilton, head of JP Morgan Asset Man-
agement’s global multi-asset strategy, the rise in volatility
is normal and has not led to any portfolio de-risking for the
investor so far.
“You are looking more at a market going through a bout
of indigestion,” says Bilton. “It is still possible to take equity
risk. Over thirty years the FTSE has been in a bear market
one-fifth of the time, the rest is bull. When in the bull market
it will be correcting or falling 14% of the time. Corrections
are a natural part of the equity market.”
Despite the tremors, the global economy remains strong—
and, as Wenzel says, the best hedge for equity declines is a
positive economy. Investors are hoping this will continue to
prove true.
Issue 55 // TheTradeNews.com // 49