Investors Hedging Against Stock Market Collapse Jumps to Record

(Bloomberg) -- Investors with $588 billion surveyed by Bank of America Merrill Lynch are making sure they’re ready for the next equity market retreat.

While asset managers aren’t positioning for a breakdown in the U.S.-China trade talks, according to the monthly global survey through May 9, a record 34% of market players surveyed have bought protection against a sharp drop in the stock market over the next three months. Investors see the trade war as the biggest tail risk, although concerns are still below last summer’s peak, the survey showed.

Global markets have been in turmoil this month as the U.S.-China tariff negotiations showed little sign of progress and as China targeted some of the biggest U.S. exporters in response to American duties. Stocks rallied across the world this year largely on the optimism that the two nations would come to a mutually beneficial trade agreement.

Traders reduced their exposure to equities compared to the April survey and removed their underweight position in euro zone and banking stocks and added to tech shares by reducing exposure to bond proxies and commodities. As a result of investors becoming more optimistic on European stocks, shorting the asset is no longer the world’s most crowded trade, giving way to the bet on U.S. tech stocks.

But so far, although investors are well-protected against a major drop in equities, the survey participants say U.S. stocks would need to fall another 18% before the Federal Reserve steps in to boost markets and cut rates.

A total of 195 fund managers overseeing $588 billion in assets responded to the global fund manager survey.

©2019 Bloomberg L.P.