Top fund managers brace for uncertainties hedging, stockpiling cash

Top fund managers brace for uncertainties hedging, stockpiling cash

November 26, 2020 0 By User

Some top fund managers started hedging as of the first quarter this year to cover from market swings and downturns. With the uncertainties of the COVID-19 pandemic continuing to encapsulate market recovery, fund managers may invest in hedging methods, such as short trading and derivative trading.

Hedging, in simple terms, is an investment strategy meant to reduce potential loss and in the same time it is not to maximize potential gain.

It is really an opportunity cost in term of waging the cost of the hedge against lost profits from being on the wrong side of the investment. In any negative event, the hedge ‘insures’ that the impact is reduced. 

With an uncertain future, savvy fund managers are quickly stockpiling cash so they could redeploy to more conservative financial instruments like equity and fixed income.

For example, billionaire investor Bill Ackman of hedge fund Pershing Square Holdings Ltd., is betting on the bearish of corporate credit (fixed income instrument), as reported by the Financial Times. Ackman banked $2.6 billion in March after taking exposure to credit default swap indexes – a form of hedging tool – on corporate debt, during the first wave of lockdowns.

Ray Dalio of Bridgewater Associates, one of the top fund managers, started reducing risks by raising cash to protect their investments, including pension funds and sovereign wealth funds. Bridgewater Associates, the $160 billion fund house, reported losses for the year ranging from 9 percent to 21 percent.

According to Hedge Fund Research, the average hedge fund was down about 9 percent this year. That said, the strategies used to pare losses is far better than the S&P 500, which reportedly lost about a quarter of its value because of the COVID-19.

In Europe, Credit Suisse Group AG is closing down funds as its alternative asset management business after struggling to perform, again because of pandemic. Germany’s Allianz closed down two funds after losing around $4 billion of pension funds for truckers, teachers and operator of New York’s transport system in the United States. Allianz is currently being sued for not using options to hedge against a short-term market panic.

In Japan, Government Pension Investment Fund (GPIF), the world’s largest pension fund, raised its allocation for foreign bonds (fixed income instrument) from 15% to 25% and lowered domestic bonds allocation to 25% from 35%, in April, says Reuters.

GPIF’s president Masataka Miyazono disclosed a record quarterly loss of 17.71 trillion yen ($168.6 billion) in the first three months this year because of COVID-19.  

On a separate note, the current big sell-off made by legendary investor and Berkshire Hathaway CEO Warren Buffett raised concerns about his views on the overall US economy.

Buffet sold off almost his entire stake in JPMorgan Chase of 22.2 million shares (valued at more than $2 billion), from his original position of 59 million shares at nearly $8.3 billion last year.

In short, most pension funds are not hedged because of the investment horizon, which is still not completely immune from global uncertainties.

Funds with illiquid investments may be forced to sell assets at a loss. Fund managers need to monitor exposures and use necessary short-term measures to weather the uncertainties.

The least is to mitigate any liquidity risks, so that what the Australian pension fund experienced for not being able to return part of AUD$3 trillion savings could be avoided.