Holding cash is the best protection against bond and stock markets inflated by record monetary stimulus.
That’s the view of Norwegian hedge fund firm Sector Asset Management, which manages $1.6 billion, and holds as much as 50 percent in cash in one of its funds.
“What can kill us now?,” Peter Andersland, the 55-year-old founder of Sector, said in an interview on Tuesday at his office overlooking the Oslo fjord. “It’s the correlation between stocks and bonds that will be induced by higher rates. That’s the biggest risk in the capital markets today, not geopolitics or Trump.”
Massive central bank stimulus with below zero rates and quantitative easing has led to increasingly dysfunctional markets, with even the negative correlation between stocks and bonds breaking down. They are now largely moving in the same direction as markets have become more driven by central banks, leaving investors with no place to hide.
“Everyone is thinking about managing risk through diversification, a little bit in bonds, a little bit in stocks,” he said. “But if the correlation increases between those two then that risk management based on diversification doesn’t help. Because everyone is doing that.”
Sector, which bets on trends for countries, sectors and stocks, is protecting itself against the rising correlation by shortening duration in its investments and placing bets that will pay off when volatility rises. To do this they are holding more cash, shorting stocks and buying cheap put options, according to Andersland.
“The whole world is wrongly positioned,” he said. “The common denominator for everything is the long duration -- real estate, stocks, bonds. Everything is much more rate sensitive now.”
Andersland manages the global multi-strategy fund, Sector Polaris, and two global equity funds of Sector’s eleven funds. Polaris, which seeks absolute return, had since its start in 2006 through July this year returned 50 percent compared with 81 percent for the MSCI World Index. The volatility for the fund has been only 5.4 percent compared with 16.7 percent for the benchmark. The fund holds about 50 percent cash.
“Risk is what you don’t think about, you can’t calculate it,” he said. “My analysis is five to ten percent more upside for global stocks, 40 to 60 percent downside for global stocks, MSCI ACWI. So it’s very skewed.”