The world’s largest private bank is doubling down on exotic strategies to profit from the intensifying meltdown in the synchronized bull market.
As Wall Street frets another annus horribilis, UBS Global Wealth is embracing a playbook beloved by hedge funds — a slew of options trades that bet, for example, on the continued outperformance of U.S. healthcare stocks versus industrials when tensions in commerce sink equities.
The $2.4 trillion money manager’s skeleton key to unlock ever-more complex and fitful markets also links the yield curve to the fate of stocks, and the latter with currency moves.
It’s one solution to the investing conundrum facing its ultra-wealthy clients: How to navigate a multi-speed world in which the global expansion looks long in the tooth and liquidity is tightening.
As bearish forces grip assets unevenly, the strategy draws inspiration from fast-money investors who buy and sell related securities to profit from price distortions, or relative-value trades.
“As the cycle ages, volatility tends to rise, and it rises because policy support starts to become a headwind in different countries and at different times,” said Vinay Pande, head of trading strategies at UBS Global Wealth Management’s Chief Investment Office. “Those are the reasons you have bigger relative swings across markets.”
One hot strategy is to bet on stock performance in a shifting bond landscape. Though the relationship between the two is debated, Pande likes options that link a steepening yield curve to falling share prices.
“Owning options on the yield curve steepening out is the cheapest it’s ever been,” said Pande. “And you can cheapen that considerably if you make it conditional on the equity market performing poorly.”
Another stocks-rates trade involves buying low-cost call options on the S&P 500 Index conditional on the 10-year Treasury yield remaining range-bound. The theory is that it’s unwise to go long risk assets sensitive to the discount rate like equities if the benchmark note makes a big move.
Hedge funds pursuing the relative-value style are among the top performers in a torrid year for the $3 trillion industry, beating most peers that run directional strategies, according to data from Eurekahedge Pte Ltd.