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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