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Alternative Market Briefing

As investors look to hedge risk, managers warn of drawbacks

Thursday, June 07, 2018

Bailey McCann, Opalesque New York:

As volatility has returned to the market, investors are looking for ways to hedge their positions. However, delegates at the recent Opalesque UK Roundtable note that hedging can be an expensive proposition and investors should be aware of the potential drawbacks.

"We know that over history, the seller of protection tends has tended to be the one who comes out better when it comes to hedging," said Luke Ellis CEO of Man Group. "The reality is that buying tail protection, unless you're doing it for regulatory reasons, requires amazing timing."

Ellis says that investors have been conditioned to ask for clever trades that can be used as hedges but they aren't willing to pay the premium for them. He argues that in many cases it is better for investors to just sell out of positions they are no longer comfortable with and work out the potential losses. The problem with hedges can be that if a given market scenario plays out even slightly different than what the hedge is prepared for, investor portfolios can take an unexpected hit.

Andrew McCaffery, Global Head of Client-Driven & Multi-Manager Solutions at Aberdeen Standard Investments adds that often the desire for complex hedges arises out of short-term thinking. When investors are focused on managing short-term risk the cost of a hedge may seem acceptable on paper. But, if investors shift their thinking and game out how risk looks over longer time horizons they may find t......................

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