Investors Seek Protection as Conflict Disrupts Long-Standing Investment Approaches

Market Turmoil Forces Rethink of Hedging Strategies

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The intensifying conflict in Iran is disrupting long-standing principles that have guided risk management for years. As traditional hedges lose their effectiveness, investors are being pushed to explore new avenues for portfolio protection.

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With both equities and bonds moving in tandem and oil markets experiencing extreme volatility, conventional risk mitigation tools are falling short. Asset managers are now turning to alternative safe havens, such as select stocks, corporate bonds, option-based strategies, and niche areas of the credit market. The US dollar, Chinese equities, the Australian dollar, and commodities like aluminum and soybean oil are seeing increased interest as investors seek new ways to shield their portfolios.

Underlying these shifts is a growing fear of stagflation—a scenario where persistent oil price hikes drive inflation higher while economic growth stalls. This has led to stronger correlations across asset classes, prompting a reassessment of what it means to hedge risk. The effectiveness of these new approaches is putting post-financial crisis risk frameworks to the test.

“With correlations changing, traditional rebalancing between stocks and bonds, as well as using inflation-linked bonds or gold, is no longer providing the protection investors expect,” explained Rajeev de Mello, global macro portfolio manager at Gama Asset Management. “The range of effective diversification tools has shrunk considerably.”

One major challenge is that inflation risk limits central banks’ ability to cut rates in a downturn, undermining the classic 60/40 portfolio mix. Without aggressive monetary easing, these traditional strategies may not deliver the desired results.

Goldman Sachs Asset Management, for instance, has reduced its exposure to market swings by employing non-linear equity protection, credit hedges, and allocating more cash to risk management strategies. Invesco has advocated for investments in commodities transported through the Strait of Hormuz, such as aluminum and grains. Meanwhile, Gama Asset Management has increased its dollar holdings and used equity futures for hedging. Pictet Asset Management has trimmed equity positions, added put options on stocks and corporate bonds, and boosted dollar exposure.

Seeking Safe Havens

As investors search for stability, multi-theme strategies—such as focusing on companies involved in nuclear energy and the digital economy—are gaining ground in Asia, according to Bloomberg Intelligence. Christian Mueller-Glissmann from Goldman Sachs recommends a blend of high-quality trades across equities, credit, and currencies, along with alternative assets, dynamic risk allocation, and option overlays.

Popular tactics include bearish option spreads, calls on the Euro Stoxx 50 Volatility Index, and puts on European industrial and German stocks. Many investors are also increasing their dollar holdings to weather market turbulence. Goldman Sachs has adopted a neutral stance on equities and is overweight on cash, citing the risk of an energy shock reminiscent of the 1970s.

“It’s still too soon to make bold moves, especially given the recent market swings,” said Fesa Wibawa, investment manager at Aberdeen in Singapore. “We’ve made modest adjustments to currency risk, guided by valuations and fundamentals, while largely ignoring short-term volatility.”

The Dollar’s Comeback

This time, unlike during the 2022 Ukraine crisis, markets were positioned for a weaker dollar before the current turmoil. Now, the Bloomberg Dollar Spot Index is near a two-month high, and options data suggests traders expect further gains.

“Before the conflict, the prevailing strategy was to hedge against US risks,” noted Mitul Kotecha, strategist at Barclays Bank. “Now, the dollar is reasserting itself as a safe haven and has rallied accordingly.”

For investors who fund in dollars, the cost of hedging currency risk against eight major Asian currencies has dropped to its lowest level in over a year, according to Bloomberg data.

Chinese equities have unexpectedly provided stability, thanks to the country’s diversified energy sources, which reduce its reliance on oil shipments through Hormuz. The Australian dollar has also become a safe haven, buoyed by higher energy prices and expectations of an imminent rate hike. Malaysia is attracting attention for its commodities exposure and lower correlation with other emerging markets, according to analyst Nirgunan Tiruchelvam of Aletheia Capital.

Managing Risk in Uncertain Times

“When volatility spikes, we often prefer to sell it—such as by selling puts on assets we’re comfortable owning at lower prices,” said Mohit Mirpuri, partner at SGMC Capital. “We also maintain buffers with short-duration, high-quality bonds and significant allocations to precious metals like gold and silver.”

Hironori Akizawa of Tokio Marine Asset Management has increased cash holdings, anticipating that a prolonged Middle East crisis could heighten stagflation risks. Danny Wong, CEO of Areca Capital, is focusing on stocks with high dividends and strong local demand.

With traditional correlations breaking down, fund managers emphasize the importance of adaptability and selectivity over standard diversification techniques.

“Classic hedges aren’t attracting the usual safe-haven flows, so we’re relying less on broad cross-asset hedges and more on targeted stock selection and equity risk management,” said Gary Tan of Allspring Global Investments. “We’ve reduced risk by raising cash and shifting into defensive assets.”

Reporting assistance by Malavika Kaur Makol and Marcus Wong.

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