- For much of the past 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 the Swiss franc have been reliable hedges of sorts, providing needed fallback returns during risk-off environments.
That's no longer the case, and it has left traders with "no places to hide," Goldman Sachs says.
The firm notes the diverging performance of Treasurys and other haven assets, marking a reversal from last year when they were moving in 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 market largely expected the central bank's initial rate hikes, they've still led to a "rate shock environment," Goldman says. The firm also blames an unexpectedly weak dollar, which it 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, known as the VIX. None of the 21 assets Goldman looked at had a positive beta to the VIX, which has led to "diversification desperation," it said. (See the chart below for details.)
For context, the VIX trades inversely to the benchmark S&P 500 roughly 80% of the time, suggesting 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 apparently 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 note to clients. "Finding effective hedges in the cash space will continue to be difficult going forward as rates rise and Goldilocks fades."
