MARKETS

UBS CHANGED STRATEGIES TO ATTUNE IT WITH STAGE OF MARKET CYCLE

The big worry is at the very peak of the cycle, both bonds and stocks are prone to a selloff. So what is the point in buying one and selling another? As the cycle matures, your approach has to evolve.” Vinay Pande | Global head of Trading Strategies at UBS AG

Clients in the Middle East have joined their overseas peers to resort to smallterm hedging strategies even as market risks become idiosyncratic, triggering similar reaction from bonds and equities resulting in a breakdown of diversification between asset classes, leading experts say.

The cost to hedge against the steepening of the yield curve (which means the longer dated securities yield more than shorter ones due to expectations of higher rates even as inflationary pressures rise) is quite low. This has attracted funds into the short-term trading or hedging strategies.

The 30-year US Treasury yield saw its steepest rise since the start of the year, rising from 2.96 per cent in late August to 3.4 per cent now.

“The flows have been going in short-term opportunities. We have seen substantial flows from all centres in strategies that offer protection against yield curve steepening. Ordinarily when the Fed raises rates, the yield curve flattens in a sell-off,” Vinay Pande, global head of Trading Strategies at UBS AG told Gulf News from New York.

We are approaching the late middle or early last stage of the cycle. This is where risk rises to financial assets.” Vinay Pande | Global head of Trading Strategies at UBS AG

‘Increase in awareness’

“The flows have increased a lot relative to past years, as back then no one was concerned. There has been a large increase in awareness. The awareness is coming from across the board from Asia and EU,” Pande said.

UBS has changed its hedging strategies to attune it with the stage of the market cycle.

“The big worry is at the very peak of the cycle both bonds and stocks are prone to a selloff, so what is the point in buying one and selling another. As the cycle matures, your approach has to evolve. We are approaching the late middle or early last stage of the cycle, and this is where the risk rises to financial assets,” Pande said.

UBS is resorting to strategies such as buying a call on S&P 500 index conditional on the rate market remaining rangebound among others. UBP has also witnessed a gush of money into their hedging strategy. In the first six months of the year. Assets under management, which were $150 million (Dh551 million), have doubled.

“That number is increasing quickly. I think this pace will continue in the near future,” Philippe Henry, global head Cross-Asset Risk Premia & Overlay Solutions at UBP — Union Bancaire Privée - told Gulf News. The bank is making use of two types of hedging strategy which are tactical hedge and strategic hedge.

That number is increasing quickly. I think this pace will continue in the near future.” Philippe Henry | Global head Cross-Asset Risk Premia & Overlay Solutions at UBP — Union Bancaire Privée