/ MARKET RISKS / call options on some European banks ( as a hedge against a spike in interest rates ) and a number of other cheap options on low probability events such as a spike in uranium prices or a shock in ETFs .
“ We like to buy cheap protection wherever we find it , and this is often done through very simple call or put options ,” he said .
“ We have no idea if and when these individual hedges will become valuable , but they are valuable in the context of the entire fund , as it allows us to maintain other positions and provides an element of positive asymmetry whenever we have some unexpected shock in markets .”
OVERCOMPLICATING THINGS However , Gary Potter , co-head of the multi-manager team at BMO , says that while many managers are feeling uncomfortable at the moment in what he describes as “ the bull market that everyone has come to hate ”, he warns against overcomplicating things when it comes to hedging risk .
“ This is the bull market that everyone has come to hate ”
“ A lot is made by the macro multi-strategists who say ‘ we know this and we know that ’. Well , the only thing we can offer you in that respect is that when we look at our research , we find that in single sectors , consistency is a very rare commodity ,” he said .
“ When you say ‘ well , we know what macro strategy to play , which equity market to be in , which currency to overlay it with , which part of the bond market curve we should be in ’, frankly , you are introducing an awful lot of extra risk in that sense , so we keep it as simple as possible .”
Potter says the perfect example of why this can be counterproductive could be seen in the aftermath of the US election .
“ If you had been in the know the day before , if you knew everybody ’ s voting trends and you knew that Trump was going to win , the consensus on that was that you should sell equities and buy gold , because the market was going to sell off ,” he added .
“ But within 24 hours , gold was down and equities were up 3 or 4 per cent . So even if your macro view was right , the market taught you a lesson .”
A SENSIBLE ORDER Potter says that rather than trying to second-guess the market , he prefers to spend more time on what he has influence over : fund managers and their capabilities . He adds that this wouldn ' t be such a bad strategy for retail investors to follow .
“ Let the long-term managers do their work . We put them together in a very sensible order and you get the kind of returns we have received over the long term . And it kind of works . So we ’ ll always try and do things , but we ’ ve learned time and time again that if you try and be too clever , the market will take you apart .”•
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