Citi: Here's The Best 'Simple' Hedge In Existence

As the S&P 500 continues to trend mostly sideways so far this year, an increasing number of investors are becoming nervous that the six-year bull market may be finally reaching its top. Citi Research analyst Stephen Antczak sees this market anxiety reflected in the growing number of clients asking about hedges in recent weeks. Antczak recently tested six possible hedges and released a report on his findings.

The candidates
Antczak tested six hedges in six different bear market environments and also tested for weakness in bull market environments before declaring a winner. Here’s a breakdown of the five hedges he compared:
1. Long 10-year treasury
2. Underweight triple-Cs/overweight cash
3. CDX.HY
4. CDX.IG
5. HY credit total return swap
6. CDX.IG equity tranche

Bear environment
In the bear market environment, Antczak found that 10-year treasuries performed best. “The reason is simple—the flight-to-equity bid can be a very powerful force, and the Fed and other central banks have been easing, not tightening,” he explains. The chart below includes the average rankings over six different bear markets on a scale of 1-7, where 1 is best.


Bull environment
In the bull market environment, the underweight CCC strategy performed the best. Antczak notes that the CDX hedges were consistent underperformers.


Putting it all together
Antczak compiled the average performance data in both bull and bear market environments to determine the best overall hedge. However, he also incorporated consistency into the equation, since consistent performance is a key element in any solid hedge.


Once he factored in the standard deviation of performance, the clear winner became the HY credit TRS hedging strategy. “TRS and 10-year Treasury both seem effective, but TRS is a more reliable alternative,” Antczak concludes.