"Even With VIX Above 20": 5 Macro Hedges That Goldman Likes

As we detailed earlier, even with the VIX above 20, the level of dispersion under the surface of the market is stark.

Combined with thematic and factor vol at the highs, top trader Louis Miller notes that Goldman Sachs sales/traders are fielding more and more inquiries on how to manage the topical market risks in a targeted way.

Currently, they favor the following macro hedging solutions:

• Short High-Yield sensitive equities (GSXUDEBT) given high yield credit spreads are expected to widen in-line with GS forecasts. The GSXUDEBT basket is composed of CCC-rated issuers and non-rated companies with similar fundamentals (negative free cash flow and high debt ratios).

• Short BDCs (GSFINBDC) or Alternative Asset Managers (GSFINALT) to manage private credit risk given high software loan exposure as market participants continue to debate the terminal value within this space.

• Long Geopolitical Risk Exposed Equities (GSXUGEOP) or our Oil Factor Pair (GSPUOILY) as geopolitical tension continues to stay top of mind. According to GS Research, the move in oil over the weekend corresponds to six-week full halt in Strait of Hormuz flows. However, if the market demands a premium for the risk of more persistent supply disruptions, there is still room for oil to rise substantially.

• Short Beta (GSP1BETA) & Long Quality (GSP1QUAL) based on historical analysis that shows these factors are most reactive during a broad market sell off.

• March & June-end SPY put-spreads stand out as the most capital-efficient way to express downside without absorbing the full theta bleed of outright puts in the current backdrop.

Breaking down the potential risk drivers:

Credit Risk

Our credit research team highlights since the local tights on January 22nd, USD high yield indices have widened by 39bp, materially underperforming equities on a beta-adjusted basis. Starting from historically rich valuations, market participants have begun to demand more risk premium from issuers in industries most exposed to AI-driven disruption, reflecting a growing reluctance to underwrite business models viewed as most particularly vulnerable.

We like going short our basket of high yield sensitive equities: GSXUDEBT, given high yield credit spreads are expected to widen in-line with GS forecasts. The GSXUDEBT basket is composed of CCC-rated issuers and non-rated companies with similar fundamentals (negative free cash flow and high debt ratios). These companies have ~$86B short-term debt outstanding. Biotech is capped at 10% of the basket and the rest is weighted equally with a liquidity of $100m in one day with no name exceeding 4% of volume.

Historically, GSXUDEBT has always tracked HY credit spreads

The focus following the software drawdown has been Alternative Asset Managers (GSFINALT) & Business Development Companies (GSFINDBC) given the questions around terminal value. BDCs have average software loan exposure of over 20% and redemption requests including OWL Loan Sales and Blackstone. The Alternative Asset Managers Basket has been underperforming YTD, catching down to BDCs which have struggled to catch a bid over the last year. That being said, while BDC expected earnings have been trending down, Alts Earnings have not moved lower yet. GSFINALT can trade over $100mm in a day at 10% ADV and GSFINBDC can trade $30mm in a day at 10% ADV.

HY and leveraged loans, year-to-date spread moves have been correlated with measures of AI exposure, with the largest repricings concentrated in the most exposed segments such as Software and Brokers or those with second-order concerns, such as Insurance.

While the adjustment has been rapid over recent sessions, we are cautious about extrapolating too much from the initial move: the pace of technological change remains uncertain, and secondorder effects could broaden the set of winners and losers over time.

Geopolitical Risk

Geopolitical escalation is spilling beyond its original boundaries and our desk continues to field questions regarding geopolitical risks escalating in the Middle East. Our US geopolitical risk basket (GSXUGEOP) has quietly outperformed the market by ~23% year-to-date. According to GS Research, the move in oil over the weekend corresponds to six-week full halt in Strait of Hormuz flows. However, if the market demands a premium for the risk of more persistent supply disruptions, there is still room for oil to rise substantially. This morning WTI crude hit new highs as Iraq cut output.

Our Geopolitical basket (GSXUGEOP) is composed of defense (GSXUDFNS), oil producers, and oil tankers. Relative to the S&P excluding AI (SPXXAI), the basket is up ~23% YTD driven by both the defense and oil exposed names.

For a market neutral implementations, our Wolfe Oil Pair (GSPUOILY) has tracks front end crude futures.

The pair (GSPUOILY) represents an equal notional pair trade of going long GSXUWFOL (outperforms as oil prices increase) and short GSXUWFOS (underperforms as oil prices decrease) and is controlled to have limited exposure to sectors/industries and other factors while remaining liquid enough to trade $500mm in a day at 10% ADV per day.

Factor Hedges

In a market drawdown, being short high beta vs long low beta names have paid off every time (see table below).

Our Beta pair (GSP1BETA) have proven to be an efficient hedge during the top 10 SPX drawdowns in the last 10 years (100% hit rate)

Breakdown of top 10 SPX drawdowns in the last 10 years and factor performances:

Our US Quality Pair Index (GSP1QUAL) is built to provide Quality exposure combining Z-scores of four fundamental variables across Profitability, Leverage, Size, Earnings Stability.

Long Quality (GSP1QUAL) consists of high profitability, earnings stability, larger cap and lower leverage) has outperformed historically and has proven to be a good market hedge.

S&P Normalized Put-Call Skew

For those interested in a capital efficient way to express downside the March- & June-end SPY put-spreads stand out (h/t to Joe Clyne). A few structures we like (ref 675):

• 31 Mar SPY 650/610 put spread (~$5) – This structure captures the area around longer-term CTA triggers and strikes where dealers are net short options. It offers defined-risk downside exposure if the pullback accelerates, while keeping premium outlay relatively contained.

• June SPY 670/620 put spread (~$11) – Further out the curve, skew remains steep. This structure allows you to lean into that richness while positioning for a more sustained move lower through mid-year.

Professional subscribers can read much more from Goldman's Sales & Trading team here at our new Marketdesk.ai portal