Understanding Equity Hedges

With stocks on a rollercoaster ride this year, Russ discusses the various potential hedges that could smooth the ride.

2019 is fast becoming a year of extremes. After the best start to the year in decades, U.S. equities experienced one of their worst Mays on record. While stocks have subsequently bounced, the damage to risky assets lingers.

The Nasdaq Composite and Russell 2000 indexes flirted with correction territory, down 10%, while semiconductor stocks approached bear market territory, down 20%.

Given the sudden shifts in the market, investors are once again exploring how to best hedge equity risk.

The challenge is that not all hedges work in all circumstances. For example, what helps insulate a portfolio against higher inflation is not the same as what you’d want to own if you were worried about a recession.

The good news today, to the extent there is any, is that investors know what they’re trying to hedge: a trade-induced slowdown. And if a slowing economy is the proximate danger, history suggests three, fairly reliable portfolio hedges: duration, gold and the yen.