With Ray Dalio warning that QE no longer works:
"it is difficult to push the prices of these assets up and it is easy to have them fall. And when they fall, there is a negative impact on economic growth. When debt levels cannot be increased without reducing spending — stimulating demand is more difficult."
It might behoove some investors to "hedge" as opposed to BTFD in FANGs. As BofAML's Jason Galazidis explains,
Since 2014, risk-off episodes have been typically characterized by short-lived bouts of volatility which mostly remained localized to a particular asset class or region as central banks have been aggressive in their actions to calm markets. In our 2016 Year Ahead we anticipated such instances would become more frequent, with an increased likelihood of global contagion as the Fed embarked on a rate hike cycle, reducing their willingness to intervene at the first sign of stress. Indeed, volatility across asset classes has steadily risen over the last few months with global equity vol and US IG credit spreads having breached their 8yr+ median levels.
Hedge costs have risen across the board to levels last seen during the May-12 sell-off. FX options continue to offer best value with SEKUSD and EURUSD puts ranking as the top hedges in our screen. Within equities, NIFTY puts continue to stand out, while KOSPI puts also offer good value, on relative basis. RTY (Small/mid-cap US equities) puts are the most attractive DM equity hedge at current pricing, while S&P500 and NDX puts are among the most overpriced hedges across all markets.
Cheapest hedges for systemic crash risk...
Cheapest 'proxy' hedges for US equities (S&P 500)...
Proxy hedging the S&P500 with Russell (small/mid cap US equities) puts continues to screen attractive. In fact – at current pricing – RTY puts would have offered 45% better value than S&P500 puts during the latest sell-off (labelled ‘7’ in the chart above). Moreover, RTY puts would have delivered similar or superior protection to S&P puts in 8 of the top 10 S&P drawdowns since ’06.
But in general proxy hedges for Chinese stocks, HY Credit, EM FX are all weak due to basis risk (i.e. lack of tracking) and is not helped by a surge in volatility across all markets...