Markets have changed a lot lately. In two weeks, we’ve gone from all-time-highs to a bear market and talks of negative interest rates. People around me are concerned as to what they should do in an environment like this. Where do you put your money if interest rates go to zero or even below?
Currently, the federal funds rate sits at 1.25%; one year ago, it was at 2.5%. Anybody that closely monitors their savings account has noticed it dwindling. The same thing goes for bonds, which all now yield less than 1%. With yields this low, risk-off means losing money to inflation.
What’s even scarier than losing money to inflation? Negative yielding savings accounts. Currently, predictions for interest rates are showing the Federal Reserve is going to change the rate to 0–0.25% by April and even further past then. Past 0%, banks start charging people a ‘storage fee’ for deposits instead of yielding interest. In Europe, we’ve seen negative rates for years. America might not be too far off from these policies becoming a reality. Once you consider inflation, you’re easily losing 2% on a savings account or Money-Market.
So, where do you put your money when both stocks and bonds yield poorly?
Many investors are moving risk-off right now — and they should. Traditionally, bear markets last for 22 months and shave off 39% from the indexes. Those statistics mean our current market is going to get worse and stay that way for a little while. But with bonds likely to yield negative in the coming weeks, risk-off becomes more of a challenge.
That’s where hedge funds come in.
Hedge funds seek to protect themselves from downside using hedges (it’s in the name !). Many funds use strategies with a low Beta, which means their returns have a low correlation to the stock market. While stocks were rallying 15–20% in a month back in December, Hedge funds only did half that. But when markets take a turn for the worse, hedge funds protect themselves from a lot of the carnage.
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Here are some highlights from the EurekaHedge report on funds during a bear market:
- In 2008, equities fell by over 40%. Hedge funds lost only 18% (on average).
- In 2000–2002, equities fell by 47%. Hedge funds gained 42%.
- In 1998, Equities fell by 13%. Hedge funds lost 4%.
In recent news, the Hedge Fund Index recently outperformed the market significantly. In February, the Eurekahedge Hedge Fund Index lost 1.63% compared to equity losses of 7.8%. 34% of funds had positive returns, and 90% of funds outperformed the market. Not too bad of a place to sit during the storm.
Moving risk-off is a good strategy with global markets in turmoil. Savings accounts are quickly becoming unprofitable, and stocks are seeing some of their worst weeks in years. Hedge funds are the bunker to weather the storm while not losing the opportunity for the upside. They offer wealth protection and the ability to beat the market in a time where it matters most.
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