Investors Abandon Hedges: Who Needs Em? The Stock Market Only Goes Up

Mish

With the stock market on a record tear, investors increasingly view hedges as a money-losing operation.

With volatility at consistently low levels, more investors are revising their strategies on risk. Apparently these is no downside risk anymore as Investors Abandon Hedges.

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After a long stretch of stock market tranquility, more investors are concluding that paying for hedges to protect against any sudden downturn is a waste of money. The S&P 500 jumped 19% in 2017, and the Cboe Volatility Index, known as the VIX, had its quietest year in history. That meant investors who bought such options were often stuck with worthless contracts.

More investors are concluding that during an extended period of low volatility, paying for insurance against wild price swings is a luxury they can no longer afford. Purchasing market protection eats into returns. Already squeezed by competition from passive investments like exchange-traded funds, active managers these days feel they can’t risk falling behind in a rally.

Some data indicates that either demand for protection is low or investors are favoring bullish options on the S&P 500 instead. A measure called skew, gauging the cost of insuring against short-term stock declines, has been near a one-year low, data from Credit Suisse Group AG showed in a December report.

“I haven’t seen hedging activity this light since the end of the financial crisis,” said Peter Cecchini, the New York-based chief market strategist at Cantor Fitzgerald. “It started in late 2016 and accelerated in the second half of the year.”

Sum of Vix Closes Under 10

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Blow-Off Top Beginning or Near the End?

Add the above chart to the list of items that suggest the blow-off top is in the very late, not early stages.

For further discussion, please see Hussman Questions Grantham's "Melt-Up" Thesis.

Mike "Mish" Shedlock

Comments (7)
No. 1-7
Quagmire
Quagmire

"But this time it's different". I know. Dark humor, but I still laugh.

CzarChasm-Reigns
CzarChasm-Reigns

Alright, alright, alright: NO RISK! But doesn't that translate to NO REWARD?

AWC
AWC

Fed's got your back, BTFD.

Roger_Ramjet
Roger_Ramjet

It's my view that this is blatant market manipulation by Central Banks. First they crushed interest rates, then added QE, and the last component of the formula is to crush volatility. Put that into your Black Scholes model.

Taunton
Taunton

@Sechel hedges aren't about being bearish, they're about covering your ass. Many advisors' primary job is not to gain returns, but to not lose their clients' money. Seems many are forgetting about that part of the job, or they just think the stock market will never crash, which it will, it always does.

Ambrose_Bierce
Ambrose_Bierce

The big pension funds dropped their Hedge Fund agreements last year, because of the fees and the projected returns were lower than the fees. Of course the market has been on a tear since then. It's easy enough to hedge with ETF products, if you are mainly indexed, which I suppose the pension funds are indexed. Investors assume there is time to buy those 3x Bear funds, after the market puts in a top. The problem with buying ETFs many of which set at the end of the day, is that your position is duly noted and set for the squeeze the following morning. At some point the deep pockets will see more potential on the downside and take this market down hard and far long before you day traders put on your slippers in the morning

ReadyKilowatt
ReadyKilowatt

How much of this ever-increasing market is due to boomers' 401(k) contributions? I know that we keep hearing about the lack of savings by the population, but maybe they're starting to see the light? Heck, even a small percentage who does save might cause a lot of this.
Or could it be that foreign investors are buying to get rid of dollars? Seems like we never really hear about who is investing other than pension funds and already rich investment banks.
This has to be some new money coming in from somewhere.