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Investors buy insurance ahead of continued market sell-offs

Investors are buying insurance policies in record numbers to protect themselves from the wiped out sell-off down trillions of dollars the value of US stocks.

According to Options Clearing Corp data analyzed by Sundial Capital Research, big money managers spent $34.3 billion on put options contracts in the four weeks to September 23. This total is the largest. recorded in data from 2009 and four times the average since the beginning of 2020.

Institutional investors have spent $9.6 billion in the past week alone. The sum underscores the extent to which large funds want to protect themselves from a sell-off that has lasted nine months and has been aggressively raised interest rates by central banks across the globe to rein in high inflation.

“Investors have realized [US] The Federal Reserve is policy bound to inflation and they can no longer count on it to manage asset price volatility risk, so they need to act more directly on their own,” said Dave. Jilek, chief investment strategist at Gateway Investment Advisors.

Jason Goepfert, head of research at Sundial, notes that when adjusted for growth in the US stock market over the past two decades, the volume of equity calls is roughly comparable to that achieved during the crisis. financial crisis. In contrast, demand for call options, which could be paid out if the stock appreciated, has decreased.

Line chart Premium spent to initiate new put contracts, after 4 weeks ($ billion) shows Big money managers are hedging as the market slips

While the sell-off has wiped out more than 22% of the benchmark S&P 500 stock index this year – pushing it into a bear market – the slide has been relatively controlled, lasting several months rather than take a few weeks. That disappointed many investors who had hedged themselves with put options or bet on the rise of Cboe’s Vix volatility index but found the protection not working. as an expected shock-reducing measure.

In the first day of this month S&P 500 biggest sell-off According to Greg Boutle, strategist at BNP Paribas, for more than two years, Vix could not surpass 30, a phenomenon that has never been recorded before. In general, the big drawdowns push Vix higher than that, he added.

Over the past month, money managers have instead turned to buying contracts to buy individual stocks, betting that they can better protect their portfolios if they hedge against big moves in the market. companies like FedEx or Ford, which fell sharply after issuing a profit warning.

“You have seen this extreme dislocation. Very rarely do you see this move when the premium placed on single stocks is bid too much against the index,” said Brian Bost, co-head of equity derivatives in the Americas at Barclays. know. “It’s a big structural change that doesn’t happen every day.”

Investors and strategists have argued that the slow slide in major indexes is partly because investors have largely hedged themselves after falling earlier this year. Short-term equity hedge funds have also reduced most of their bets after a dismal start to the year, meaning many haven’t had to liquidate large positions.

Short-term volatility slanted line chart shows Demand has shifted towards bearish hedging in individual stocks

As stocks fell back on Friday and more than 2,600 companies hit a 52-week low this week, Cantor Fitzgerald said its clients are profiting from hedging and setting trades. new at a lower actual price than when they bought new insurance.

Strategists on Wall Street cut their year-end forecasts as they take the brunt of tighter policy from the Fed and a recession they warn will soon eat into corporate profits. Goldman Sachs on Friday downgraded its S&P 500 forecast, expecting the benchmark to continue falling as it dropped bets on a year-end rally.

“The paths forward for inflation, economic growth, interest rates, earnings and valuations are all more variable than usual,” said David Kostin, strategist at Goldman. “Based on discussions with our clients, the majority of equity investors have accepted the view that a hard landing scenario is inevitable.”

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