Getting Images / Spencer Platt
- For much of the last few years, investors have had plentiful options when it comes to hedging to the downside.
- Goldman Sachs argues that markets are going through a major change that's threatening traders' ability to feel safe in their investments.
Whether you've been a staunch bull or skeptical bear over the past few years, there have always been places to hide if you want to get away from it all.
Treasurys, gold, and safe-haven currencies like the Japanese yen and Swiss franc have been reliable hedges of sorts, providing needed fallback returns during risk-off environments.
That's no longer the case, and it's left traders with "no places to hide," says Goldman Sachs.
Goldman Sachs
The firm notes the diverging performance between Treasurys and other haven assets, which marks a reversal from what played out in 2017, when they were moving in close lockstep. This development challenges the reliability of what have historically been viewed as surefire hedges.
Goldman attributes the market shake-up to two drivers it says have thrown the long-standing Goldilocks market - characterized by strong growth without inflation - out of whack.
The first is the pressure caused by higher rates and monetary tightening from the Federal Reserve. While the central bank's initial rate hikes have been largely expected by the market, they've still led to a "rate shock environment," says Goldman. The firm also blames an unexpectedly weak dollar, which is says has been driven by global growth.
Another measure informing Goldman's conclusion that effective hedges are scarce is the degree to which traditional haven assets are tracking the Cboe Volatility Index (VIX). None of the 21 assets looked at by Goldman have a positive beta to the VIX right now, which has led to "diversification desperation," they said. (See chart below for details.)
For context, the VIX trades inversely to the benchmark S&P 500 roughly 80% of the time, suggesting that it's an effective hedge for the equity index. Theoretically, if haven assets are trading with a positive beta to the VIX, they should be doing their job as hedges. But that's not the case right now.
"No safe havens - and no assets or equity sectors - have had a positive beta to the VIX recently," Goldman strategists led by Ian Wright wrote in a client note. "Finding effective hedges in the cash space will continue to be difficult going forward as rates rise and Goldilocks fades."
Goldman Sachs