It’s common for investors to hedge their portfolios ahead of US presidential elections, according to Shawn Tuteja, who oversees ETF and custom baskets volatility trading within Goldman Sachs Global Banking & Markets.
“Investors – especially professional investors – hate to lose money around foreseen events, because that can be a lot harder to justify,” Tuteja says. “As such, it's common to see people put on hedges into election day and around election day. This drives the prices of options higher, and thus leads to a higher VIX.”
After the election, market volatility, and the VIX, tend to cool off. But even as they do, “big moves can happen under the surface,” Tuteja says. He points out that the correlations among S&P 500 sectors fell sharply after the 2016 and 2020 elections.
Tuteja explains that “as the winner takes office, their specific policy agenda becomes more relevant.” This dynamic can be seen in the disparate performance of the Goldman Sachs Democratic Policy and Republican Policy baskets following the 2016 election results.
Given this post-election dynamic, “it might not be enough to put on broad-market hedges,” Tuteja says. “If you're looking to hedge, it's really important to put on specific hedges to the positions in your actual portfolio.”
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