Investors Hunt for Hedges as War Shatters Decades-Old Strategies

“Investors should look at a combination of up-in-quality trades in equity, credit and currencies,  allocations to alternatives, dynamic risk allocation, and option overlays in equities and across assets,” according to strategists including Christian Mueller-Glissmann, the head of asset allocation research at Goldman Sachs’ Global Investment Research division.

They like selective bearish option spreads, calls on the Euro Stoxx 50 Volatility Index, and puts on European industrials and German equities.

A popular move has been to increase exposure to the US dollar to wait out the market palpitations. Glissmann and his team at Goldman Sachs have turned tactically neutral on stocks and overweight on cash, citing mounting risks that the Middle East conflict may spark an energy shock comparable to those of the 1970s.

“It still feels early to reposition aggressively, especially as recent price action has been quite choppy and would have penalized overly decisive changes,” said Fesa Wibawa, a Singapore-based investment manager at Aberdeen. “We have made some light adjustments to currency risk, using valuation and relative fundamentals as our main guide, while largely looking through near‑term volatility.”

Dollar Positioning

But unlike in 2022, when Russia’s invasion of Ukraine also sparked energy-led market turmoil, the reversal this time is catching a market that was positioned for dollar weakness. The Bloomberg Dollar Spot Index is near its strongest in almost two months and option metrics show traders are betting it can rise to its highest level since December.

“When you look at the dollar pre-war,” the dominant stance was “hedging America,” said Mitul Kotecha, a Barclays Bank strategist in an interview with Bloomberg Television on Wednesday. “Now, it suddenly looks like the dollar’s back as a safe haven” and has rallied on the back of this.

For dollar-funded investors, the costs of hedging currency risk have fallen to an average of 0.28% for eight major Asian currencies, the lowest in over a year, according to three-month forward implied yields compiled by Bloomberg.

Chinese stocks have worked as a surprising haven, holding up on the logic that the country’s more diversified energy supplies make it less reliant on Hormuz shipping lanes and oil imports. Meanwhile, Australia’s dollar has become a refuge, supported by higher oil and gas prices and rising expectations of a near-term rate hike. Malaysia has been another under-the-radar target for its oil and commodities exposure and weakened correlation with other emerging markets, according to Nirgunan Tiruchelvam, an analyst at Aletheia Capital.

Risk Reduction

“When volatility spikes sharply, we often look to sell it rather than buy it, for example by selling puts on assets we are comfortable owning at lower levels,” said Mohit Mirpuri, a partner at SGMC Capital Pte. “We also maintain buffers through short-duration high-quality bonds and a meaningful allocation to precious metals such as gold and silver.”

Hironori Akizawa, a fund manager at Tokio Marine Asset Management said he has been raising cash levels as a prolonged Middle East crisis can raise the probability of stagflation. Danny Wong, chief executive officer of Areca Capital is focusing on stocks tied to high dividends, and local demand.

With traditional correlations in flux, managers say flexibility and selectivity now matter more than textbook diversification.

“Traditional hedges aren’t attracting the usual safe‑haven flows, so we are leaning less on broad cross‑asset hedges and more on selective stock picking and targeted equity risk management,” said Gary Tan, a fund manager at Allspring Global Investments. “We have reduced active risk heading into March by raising some cash and rotating into defensives.”

–With assistance from Malavika Kaur Makol and Marcus Wong.

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