As the bull market rally marches on for what seems like forever, investors who typically are concerned with risk are throwing caution to the wind. Gunjan Banerji reports in The Wall Street Journal that investors who normally hedge their positions have decided buying downside protection is a waste of money. She writes:
Investors with significant positions in stocks often look to offset that risk by buying put options on stocks or major stock indexes, like the S&P 500. These contracts are a form of insurance that pay out when stocks fall.
But with the Dow Jones Industrial Average breaking through 25000 for the first time, the Nasdaq Composite crossing 7,000 and with market volatility falling to near all-time lows, many investors have decided that spending money to hedge against big declines is a waste of money. While the Dow Industrials slipped 0.05% Monday, the S&P 500 and Nasdaq Composite closed again at records.
Stock pickers are already feeling squeezed by competition from lower-cost passive investments such as exchange-traded funds and worry that they can’t risk falling behind in a rally. Purchasing market protection through hedges eats into their returns.
“I haven’t seen hedging activity this light since the end of the financial crisis,” said Peter Cecchini, a New York-based chief market strategist at Cantor Fitzgerald. “It started in late 2016 and accelerated in the second half of the year.”
Read more here.