(Bloomberg) -- In a bull market with no crashes, no sudden spikes in volatility and no lasting correction, cautious investors are struggling to find effective ways to hedge their positions. 

Buying put options, a traditional choice for protecting against downturns, has failed to pay off for investors wary of the rally that pushed stocks around the globe to new all-time highs. Volatility sellers pushed the VIX Index down to the lowest level since 2019 this month and the S&P 500 Index has gone more than 300 days without a dropping 2% in a single session. 

“This latest variety of the volatility crush and options selling violence has been so exceptionally brutal,” noted Charlie McElligott, derivatives strategist at Nomura Securities International. “Owning index options downside has been awful and frustrating enough to see funds change their vehicle for their hedges.” 

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Some investors searching for alternative assets to sell short turned to US regional banks, small caps and retail stocks, under the assumption that an economic cooldown would hit those areas of the market first and hardest. But while that seemed to work during last summer’s correction, it’s just become another headache for shorts as the those assets rallied along with the wider market.

With the brief but ferocious return this month of the meme stock squeeze, short-sellers of perceived low-quality companies are also getting a slap in the face. Two Goldman Sachs baskets of most-shorted companies in the Russell 3000 index have gained 14% and 11% respectively over the past month, while unprofitable tech and other low profitability stocks also rallied.

So that has some investors resorting to much blunter hedging instruments such as futures and ETFs, according to McElligott. While those offer less leverage and opportunity for fine-tuned positions than options, their value also doesn’t slowly decay away every month.  

“So in light of these aforementioned frustrations from recent hedges, it really does seem that leveraged funds have simply just moved into dynamic hedging with equity futures and ETFs,” says McElligott. Positioning in futures is “extremely short,” he says as the instrument is now the “now-preferred hedge since options just die.”


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