It makes sense for investors to consider what assets they should buy to hedge against a sudden plunge in the value of equities or bonds.
New research by AQR, a fund-management group, looks at the ten worst quarters for global equities and government bonds between 1972 and 2014. On average, equities lost more than 18% during such quarters while bonds, a less volatile asset, lost 3.9%.
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The AQR numbers show that government bonds do act as a useful hedge for equities, earning an average return of 4.8% in the quarters when shares plummeted. That is good news: both assets may look overvalued but they are unlikely to fall in tandem.
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There are a number of asset-picking strategies that have been shown to work over time. A combination of five of those strategies (value, momentum, carry, defensive and trend-following) would have produced very good returns during past stockmarket sell-offs.
"Buttonwood: Looking for lifeboats," The Economist, Volume 416 Number 8956, September 19th-25th, 68, Accessed on September 23, 2015, http://www.economist.com/news/finance-and-economics/21665026-which-investments-work-best-when-markets-decline-looking-lifeboats
Read the full AQR report here.
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