{"text":[[{"start":6.09,"text":"The writer is senior adviser at Engine AI and Investa, and former chief global equity strategist at Citigroup"}],[{"start":15.39,"text":"The war in the Middle East has created turmoil in financial markets. Everybody is worried about the implications for asset prices. Many are asking how they can hedge their portfolios against this volatility."}],[{"start":29.520000000000003,"text":"As ever, the answer is: it depends. Most importantly, it depends on you."}],[{"start":36.6,"text":"What are the liabilities in your life? Don’t forget that your carefully constructed portfolio is merely an instrument to meet those obligations. If you are an individual investor who needs to meet monthly mortgage payments or a fund that needs to pay regular pensions, your hedging requirements should be quite different from those of somebody saving for a future house purchase or a sovereign wealth fund investing for future generations."}],[{"start":67.24000000000001,"text":"Or maybe you are a trader who gets fired if you lose more than 5 per cent. Your tolerance for volatility is not what your models say it is. It is what your boss says it is."}],[{"start":80.59,"text":"Next, hedging depends on your starting portfolio. Where are you heavily exposed? Have you been riding the rally in US AI-related stocks, or did their high valuations persuade you to buy cheaper equities elsewhere? Or maybe you run a large endowment that followed the Yale model and is now heavily exposed to private assets. Or perhaps you have an income requirement and chose to invest in higher-yielding bonds. Or maybe you were already cautious and are heavily weighted towards cash. Each portfolio requires a different hedge. One size does not fit all."}],[{"start":118.34,"text":"Hedging also depends on the event being hedged against. A deflationary economic downturn would probably hit equity performance, but bonds should provide a useful hedge as interest rates fall. This is what happened in 2008-09."}],[{"start":137.38,"text":"But that is not what is happening now. An inflationary shock from higher energy prices has put both equities and bonds under pressure. Central banks are threatening to raise interest rates. As in 2022, fixed-income assets do not offer a hedge against falling equity markets."}],[{"start":156.76,"text":"Hedging strategies often depend on asset price correlations. These are notoriously unstable. Assets that are good diversifiers in calm markets can become painfully correlated when volatility rises."}],[{"start":171.54999999999998,"text":"For example, gold has provided a useful hedge during previous geopolitical crises, but this time round it has not. The problem is liquidity. As capital flows into previously uncorrelated assets (equities and gold last year), it gradually makes them more correlated on the way up. And as a crisis drives that capital towards the exit, they become even more correlated on the way down. As liquidity evaporates, investors sell what they can sell."}],[{"start":202.48,"text":"Over the past couple of years, many chose to hedge their exposure to high valuations in US equities by rotating into cheaper stock markets elsewhere. This had been working nicely until the deterioration in the Middle East. Asian and European markets have fallen more than the US S&P 500. Another diversifier that hasn’t worked."}],[{"start":222.12,"text":"Many investors see private assets as a hedge against volatility in the public markets. I’ve always struggled with that justification. Private equity and public equity are similarly exposed to the economic cycle, as are private credit and publicly traded corporate bonds. The hedging attractions of private assets are more a function of their smoother returns compared with the mark-to-market volatility evident in public markets."}],[{"start":251.4,"text":"Finally, the ability to hedge depends on price. Right now, you can buy equity options to protect your downside, but they are very expensive — as they usually are when investors most want them. Price, not brilliant geopolitical foresight, is why I chose to buy oil ETFs and stocks to hedge my equity portfolio last year. Gold was the more obvious choice, but it had already gone up a lot."}],[{"start":282.28000000000003,"text":"So, my advice is to hedge yourself first. Don’t tie up all your wealth in your employer’s stock. Don’t run a risky investment strategy if you have upcoming obligations. Don’t think you can time the financial markets, because you can’t."}],[{"start":299.13000000000005,"text":"As for hedging your portfolio, start simple. A classic 60-40 bond-equity portfolio has a natural hedge against rising equity prices as it takes profits to keep the equity weighting down at its benchmark. If you are worried about sustained higher energy prices, then buy some oil stocks — their valuations are still reasonable."}],[{"start":322.56000000000006,"text":"Finally, if you want to sleep at night, then move everything to cash. Reassuring for now, but inflation will get you in the end."}],[{"start":340.4800000000001,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1774409557_7444.mp3"}