The Hidden Driver Behind Crisis Hedges
Choosing an effective hedge depends on understanding the nature of the shock — particularly how it reshapes inflation expectations.
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Since the pandemic investors have experienced three mini crises and each time, they took refuge in a different corner of the market to offset losses in risk assets. Choosing an effective hedge depends on understanding the nature of the shock — particularly how it reshapes inflation expectations.
The 2008 financial crisis provided perhaps the textbook case of how safe assets perform to mitigate losses. When the subprime mortgages triggered a house price crash across multiple countries and threatened the global banking system, investors flocked to the safety of Treasuries. The dollar also soared even though the crisis originated in the US.