U.S. stock hedging strategies backfire during market rout

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Those who prepared for violent swings by buying call options on the Chicago Board Options Exchange’s Volatility Index , which would pay off if the market gauge of expected volatility spiked, have also been left wanting. Many mutual funds and exchange-traded funds that are marketed as hedging against declines in the U.S. stock market use relatively simple strategies, continuously buying contracts that would protect their portfolio if the S&P 500 falls below a given threshold. They adjust those thresholds each month, spending heavily on new put contracts in the process.

“You have had to be a very nimble tail hedge manager and a lot of them ... are rules-based and formulaic and that’s a dangerous place to be,” says Peter van Dooijeweert, a hedging specialist at hedge fund Man Group PLC.Funds that use a broader mix of assets to hedge against downturns have had a far better year. The CBOE Eurekahedge Tail Risk Index, which tracks a basket of specialist hedge funds, is up 13 per cent year to date by contrast.

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