Some investors, concerned about potential economic problems and their effect on the equity markets, are looking at hedging strategies for their stock portfolios.
"We're seeing an increase in hedging activity this year over last year," said J. Thomas Allen, president and chief executive of Advanced Investment Management LP, Pittsburgh. "Some of it is associated with Y2K concerns."
Mr. Allen added that the price of risk protection "embedded in options (expiring in) December vs. options (expiring in) March doesn't appear any different than normal."
An investor concerned about Y2K would use options expiring in March 2000 rather than December 1999, according to Mr. Allen. "I don't see anything inefficient about hedging through March," he said. "I see nothing in the pricing that you have to pay up for it."
"Clients that would have done hedging until the end of the year now want it to last into the first quarter," agreed Jeffrey Geller, a managing director of Credit Suisse Asset Management, New York.
"We're active in structured hedging strategies," he added. "We're not seeing any more business than we'd normally see, except (clients) want to go beyond Jan. 1."
However, Mr. Geller also believes the stock market will have discounted Y2K risks by the fourth quarter of the year. "The market tends to look forward in terms of risks," he said. "The market's smart. Whatever risks become apparent in the summer will be discounted before Jan. 1."
Edward Yardeni, chief economist of Deutsche Bank Securities Inc., New York, believes there is a major chance of a worldwide recession associated with the so-called Y2K computer problems, which could cause stock prices to fall sharply.
He is particularly concerned that disruptions in manufacturing in Asia could cause problems for manufacturers of products such as cars, computers and airplanes in the United States, who are dependent on factories in that region for components for their products.
"Asia had a financial crisis and put off getting ready for Y2K," he said. Mr. Yardeni thinks the stock market could begin to anticipate the problems by the fourth quarter. "I think (investors) should start hedging by the fourth quarter," he said.
"If you don't think the market has a lot to go but (you) want to avoid the downside, you can buy puts and sell calls which will form a collar," said Greg McMurran, chief investment officer, Analytic Investors Inc., Los Angeles.
He said the idea of hedging stock portfolios for Y2K risk has been brought up by some of his clients. He pointed out another important fact: "If you use listed options you have to make sure the clearing corporation doesn't fail after Y2K," he said. "Assuming it will be around, it's possible to hedge."
Mr. McMurran personally doesn't think Y2K risk is very great. He added that even if an investor waited to the end of the year to see what would happen, "if there's a panic at the end of the year, you can hedge up to the last day of the year."
Part of investment strategy
Hedging for Y2K risk "is something that can be integrated into an investment strategy," said Jack L. Hansen, senior portfolio manager at The Clifton Group, Minneapolis.
He said his firm had seen "moderate interest in hedging because of (concern over) Y2K problems."
If the stock market stays high or moves higher toward the end of the year, Mr. Hansen thinks "more concern will come to the fore."
His clients want strategies that will add to their upside potential while protecting their principal. "We use options on an overlay basis to protect (stock) portfolios," he said.
But officials at some large pension funds don't think hedging for Y2K risk is necessary. T. Britton Harris IV, president of GTE Investment Management Inc., Stamford, Conn., said, "we've seen nothing to indicate we would need to take action on our long-term portfolio." Moreover, he added, "the biggest risk is that people (will start using hedging strategies) and cause a self-fulfilling prophecy."
William Quinn, president of AMR Investment Services Inc., Fort Worth, which runs the American Airlines pension fund, said, "we make our asset allocations on a three- to five-year basis. If something happens in the short term, we wouldn't worry about it.
The Chicago Board Options Exchange has produced a white paper titled "Managing Equity Portfolio Risk in Year 2000," which is available on its Web site and discusses various hedging strategies for investors.