Money manager Sushil Wadhwani could barely get a meeting started last year before clients started grilling him for advice on how to survive the next market crash.
So in February, the chief investment officer of PGIM Wadhwani duly launched a defensive fund that takes short positions in equities and buys haven currencies, among other things.
“We would schedule a meeting to talk about our flagship strategy and in about five minutes they’d pivot,” said Wadhwani, who sat on the Monetary Policy Committee at the Bank of England before starting a money management firm later acquired by PGIM Quantitative Solutions. “Clients said they’d prefer a highly reliable protective portfolio against equities going down.”
Demand for market hedges is growing on Wall Street as Russia’s invasion of Ukraine sparks a global security and energy crisis, just as inflation runs amok and the Federal Reserve gears up to hike rates aggressively.
So-called Black Swan funds designed to protect against extreme selloffs have grown to more than $5 billion from $3.8 billion at the end of 2020, according to Eurekahedge Pte Ltd.
While the market impact of Russia’s invasion of Ukraine was smaller than that of the global pandemic, it was enough to hand investing styles that ride low-probability but high-risk events their best month in February since Covid hit.
“With the latest crisis, people tend to become more fearful and then they suddenly realize the benefits of this kind of particular portfolio,” said Richard “Jerry” Haworth of 36 South Capital Advisors LLP, who manages one such strategy in London.
Amid war, entrenched inflation and fears that the Fed’s tightening campaign will spur an economic slowdown, returns in the first quarter cratered to the worst since 1980 across equity and fixed-income markets, data compiled by Bloomberg show.
Now Nouriel Roubini, who earned the nickname “Dr. Doom” for his dark prognostications in the global financial crisis, warns the world may be “a standard deviation away from a semi Black Swan event.”
All that is firing up the industry of doommongers. There are five exchange-traded funds devoted to tail risks in the U.S. -- three of which were launched last year alone. The Cambria Tail Risk ETF (ticker TAIL) remains the biggest of its kind by far, and sat on a record $425 million of assets last month -- more than six times the pre-pandemic level.