In our market neutral approach, the work of hedging around a major event begins days, weeks or even months before. Our end goal is to be confident in our positioning heading into an event and ready for market changes as the event unfolds.
Often it’s the groundwork laid weeks and months earlier that positions us to take advantage of abnormal market conditions that can occur before and during a major event. It can be difficult to establish a hedge right before an event, so while our primary focus is on managing our current hedge, we are also keeping an eye on our “event hedge.”
The U.S. presidential election provides a case in point of how this approach comes together. We began focusing our attention on potential election outcomes shortly after Brexit. As we discussed in our review of how we invested through Brexit, we are guided by these principles:
- Take advantage of opportunities the market presents. During the months before the election, we used the market’s ebbs and flows to add pieces to our hedge. When the market fell, we added to our upside scenarios and conversely, during rallies, we added to our downside hedges. In essence, we are like many shoppers: buying items when they are out of season and on sale instead of when they are in demand and expensive.
- Focus on being advantageously positioned for as many outcomes as possible. We believe in being prepared for as many outcomes as possible—not just the predicted one.
Just as the referendum in favor of Brexit caught many by surprise, market participants were generally positioned for Clinton victory on the morning of election Tuesday. However, as we know, global markets became more volatile as the day wore on and into the early hours of Wednesday morning.
However, we had prepared for this possibility and were ready to act. As S&P 500 futures plummeted in after-hours trading, we remained active, supported by our trading desk in London. Our hedge allowed us to manage from a position of strength and take advantage of the dislocations that occurred before U.S. markets re-opened on Wednesday morning—while maintaining confidence that we could protect capital if the fall continued.