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Investors Are Spending Fresh Billions Hedging Market Mania

Yakob Peterseil
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Investors Are Spending Fresh Billions Hedging Market Mania

(Bloomberg) -- Whether it’s a bearish portent of a sell-off to come or prudent hedging after a fierce stock rebound, traders are bolstering their defenses against an end to this vertiginous rally.

Gold and longer-maturity bonds are getting outsized inflows. Protective equity options are outdrawing speculative contracts, while volatility markets are positioning for fresh disruptions.

It comes as signs of froth are emerging. The S&P 500 Index is on the cusp of its best quarter in more than 80 years even as fears of a second coronavirus wave grow. Speculative mania reigns among retail investors, while the likes of JPMorgan Chase & Co. are turning bullish on U.S. stocks.

But for all the fears that Wall Street is running headlong into risk in one of the fastest rebounds ever, hedging demand shows the frenzy is being met with some vigilance.

Yellow Metal

Net bullish bets on gold in futures and options have risen for the first time in four weeks, recovering from a one-year low, Commodity Futures Trading Commission data showed on Friday. The SPDR Gold Shares, the world’s biggest exchange-traded fund holding bullion, took in the most in about a year at $1.3 billion on Friday. Overall, gold ETFs boosted their holdings by almost 30 tons, a sign of enduring faith in the defensive asset.

One reason: bulls keep finding their faith rewarded, with the price of bullion edging toward the highest since 2012.

Duration Demand

Almost $10 billion flowed into fixed-income ETFs last week, favoring funds targeting government and investment grade debt over those buying riskier junk bonds. The iShares 20+ Year Treasury Bond ETF, ticker TLT, which buys only longer-dated government notes, had its best week in seven with $600 million of inflows. Money market-like ETFs added assets for the first time since early May.

After two-and-a-half years of bearish bets against Treasuries, hedge fund positions are now nearly completely neutral, Commodity Futures Trading Commission data show.

“A new lockdown is not in the price for equities, but a slowdown is creeping in the price of bonds” said Ben Emons, head of global macro strategy at Medley Global Advisors. “The near-term risk for markets optimism about the reopening could be a more pronounced summer slowdown than what is expected.”

Fear Gauge

The traditionally inverse correlation between stocks and the Cboe Volatility Index, the fear gauge on Wall Street, has been turned on its head recently, with the VIX rising even on days when market has rallied.

Goldman Sachs Group Inc. strategists note that “the VIX should be much lower - the gap between VIX and S&P 500 returns is one of the largest on record.”

While part of that may be down to investors chasing bullish call contracts, it may also be a sign that options markets are “less optimistic on growth so far and that equities have run up a bit too fast,” they wrote in a recent note.

Stock Hedging

Meanwhile, JPMorgan strategists argue that there’s been plenty of stock hedging among institutional investors, despite all the focus on speculative call buying by moms and pops. A measure of the price of protective puts versus bullish calls known as skew has been steadily rising for the S&P 500 and Euro Stoxx 50 indexes, they wrote in a note on Friday.

(Adds detail on overall gold ETF holdings in fifth paragraph.)

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