Skip to main content

The Globe and Mail

Hedges hold as global markets need six hours to process panic

A campaign sign for U.S. President-elect Donald Trump and U.S. Vice President-elect Mike Pence hangs on a desk while traders work before the opening bell of the New York Stock Exchange (NYSE) on Wednesday, Nov. 9.

Michael Nagle/Bloomberg

Guess what? You missed the dip.

Global equity markets were in full rebound mode Wednesday morning, rapidly retracing losses that overnight turned violent enough to trigger trading curbs on the Chicago Mercantile Exchange. The Dow Jones Industrial Average climbed and an index of investor fear that became the focus of would-be hedgers went into free fall early Wednesday.

If investors needed another demonstration of the stock market's resilience, they got it in the aftermath of Donald Trump's shock victory. For traders who piled into equity hedges in the weeks before the vote, the main question was whether anyone had time to exercise options and CBOE Volatility Index futures as markets roared back to unchanged six hours after going limit down.

Story continues below advertisement

"There was a great deal of positioning to prepare for the possibility of something like this happening," said Steve Sosnick, an equity risk manager at Timber Hill LLC, the market-making unit of Greenwich, Connecticut-based Interactive Brokers Group Inc., who likened the reaction to the plunge that followed Britain seceding from the European Union. "Fool me once, shame on you. Fool me twice, shame on me."

The VIX, the options-derived gauge tracking swings in the S&P 500 Index, plunged 19 per cent at 9:57 a.m., compared with an almost 50-per-cent jump on the day after Britain voted to quit the European Union in June. This after an event portrayed by many analysts as having the potential to unhinge markets banking on a continuation of policies that coincided with the second-longest bull market in S&P 500 history.

Deploying hedges around market events such as elections requires something like perfect timing, said Mark Heppenstall, chief investment officer of Penn Mutual Asset Management, which oversees $20-billion. Heppenstal's firm doesn't own any hedges specifically designed for Election Day but profited from volatility trading when markets swooned last week.

"You need to be pretty quick to lift the hedges after the result since markets would likely bounce back quickly after a Trump victory was digested," he said. "It's usually the unexpected outcomes when hedges are the most effective as opposed to something like today when everyone knew the potential outcomes."

To Anthony Limbrick, head of quantitative research and portfolio manager at London-based hedge fund 36 South Capital Advisors, it suggests traders are less focused on the initial shock from a Trump win than many thought.

"Volatility didn't react like it could have reacted in such an environment, especially looking at historical comparisons," Mr. Limbrick said. "This tends to suggest that the market was not completely convinced that this was an entirely bearish announcement. We could potentially see substantial fiscal spending, which could lead to strong growth. If that happens, equities could be repriced to the upside. It's all a matter of how stable the market can be in the near term."

Wall Street strategists were unimpressed. David Kostin, chief U.S. equity strategist at Goldman Sachs Group Inc., sees the benchmark gauge ending 2016 at 2,100, just 1.8 per cent below Tuesday's close and less than half a percent from where futures indicate the index will open on Wednesday. Tom Lee of Fundstrat Global Advisors, predicted the S&P 500 will rally about 7 percent from where it's poised to open Wednesday through the end of the year.

Story continues below advertisement

Investors had months to ponder the prospect of a rout and data from volatility markets show they spent liberally on instruments designed to cushion the blow. Billions of dollars of what amounts to equity insurance was bought and sold in the week before the election, a reprise of precautions that preceded Brexit.

One clear indication of the degree of hedging: outstanding futures on the CBOE Volatility Index has climbed steadily since June and for the last three months has been higher than at any time since the bull market began. Trading has surged in every corner of the market where protection is sold, from contracts tied to the S&P 500 Index to bets on volatility products.

"We shorted equities and we shorted bonds, so we're going to do well in this market," said Zhiwei Ren, managing director and portfolio manager with Penn Mutual Asset Management which oversees about $20-billion.

Report an error

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨

Combined Shape Created with Sketch.

Combined Shape Created with Sketch.

Thank you!

You are now subscribed to the newsletter at

You can unsubscribe from this newsletter or Globe promotions at any time by clicking the link at the bottom of the newsletter, or by emailing us at