JPMorgan Says Record-High US Stocks Make Hedging Difficult


(Bloomberg) -- The artificial intelligence rally is driving stocks to fresh all-time highs, and hedging those gains requires greater creativity, according to JPMorgan Chase & Co.

For traders, the difficulty is hedging any potential downturn while not betting directly against wider momentum and the AI trade, JPMorgan’s Cash Equity Trader Matt Reiner wrote in a client note.

“Shorts are getting torched,” he said. “Investors are more and more looking to balance their books with short equal-weighted S&P 500 Index as a last resort.”

The S&P 500 Index has gained 18% this year, with most of that advance reliant on Nvidia Corp., Microsoft Corp., Alphabet Inc., Inc., Meta Platforms Inc., and Apple Inc. The equal-weighted version of the S&P 500 is up just 4.6% in that time.  

Trading data in terms of options and other derivatives for the equal-weight US benchmark is thin and many of those hedges might be done via non-listed instruments and so-called over-the-counter, or OTC, positions. Looking at the Invesco S&P 500 Equal Weight ETF, which has about $55 billion in assets, short interest has risen to about 5% from nearly 1% in December.

The S&P 500 gained 1% on Wednesday, its largest single session jump in more than a month and its seventh consecutive session of gains. The Nasdaq 100 rose 1.1% — bolstered by the megacap tech firms that have propelled the benchmark gauge to 37 records this year. 

--With assistance from Thyagu Adinarayan.

©2024 Bloomberg L.P.