Coming up with the right hedging strategy as coronavirus fears rock markets is hard.
It may be time to tear off the “band-aid” in deep, liquid markets, according to Peter van Dooijeweert, Man Group’s head of institutional hedging and portfolio solutions. For some investors, that means cutting exposure to stocks to protect the core of their portfolios from plunging prices, he said by phone. They might sell during a rally that emerges in the turmoil — and hold the cash, he suggested.
“The market is grappling with an unknown” as the novel virus spreads globally, said van Dooijeweert, adding that Wall Street banks and asset managers are seeking to shield their own operations from the epidemic. For example, Man’s staff has begun testing working from home, a “common sense” move he said is going well as the needed technology was already in place.
There’s no single “magic bullet” for institutional investors seeking to lower risk in the recent market volatility, said van Dooijeweert. He suggested a range of possibilities, including trend-following strategies and put options, but cautioned that buying puts suddenly has become “very expensive.” Put options give investors the right to sell stocks at a strike price before a certain date.
It’s like trying to buy insurance “when your house is on fire,” he said. “If all you’re after is risk reduction,” he said, “it’s probably a good idea just to reduce some of your long exposure.”
Next steps could involve complex hedging strategies that are harder to assess in tumultuous markets, according to van Dooijeweert. Stocks tumbled Wednesday, with the Standard & Poor’s 500 index falling almost five percent as the number of coronavirus cases continued to rise in the U.S.
Testing for Covid-19, the disease caused by the virus, has been slow in the U.S. compared to other countries, with only about 5,000 tests done so far, New York governor Andrew Cuomo said Wednesday during a press briefing streamed live on the state’s website.
“Our testing capacity is nowhere near where it needs to be,” Cuomo said. “New York State is going to take matters into its own hands” by contracting with private labs instead of relying on the slow-moving Centers for Disease Control and Prevention.
Cuomo said New York state now has more than 200 cases and that its State University of New York and City University of New York schools will practice social distancing by holding classes online. The governor has also taken emergency measures in New Rochelle, which has the biggest cluster of coronavirus cases in the state, by stopping large gatherings.
As state and local governments move to contain the virus, Man’s van Dooijeweert is helping clients think through their hedging options by focusing on core risks to their portfolios. He said it’s challenging to hedge risks tied to private equity — which has become a bigger part of institutional investors’ portfolios in recent years — because it is an illiquid asset class.
But Man Numeric, one of the firm’s quantitative investment managers, is mimicking private equity strategies in public markets by creating its own basket of stocks. A put on that basket may be one option for investors to consider as a hedging strategy, he said.