Can Political Risk Be Hedged?

Chidem Kurdas

Financial fears dominate the stock market but another kind of danger lurks in news headlines—-like today’s story about an alleged Iranian-directed scheme to assassinate  Saudi Arabia’s ambassador to the US.  As George Tzanetatos sees it, political threats are too important to ignore.

Mr. Tzanetatos manages Global Titan, a futures trading fund with a macro approach to protecting against tail risks. One of his concepts is volatility clustering, which I wrote about earlier this year.

He argues that we’re deep on the downside of a Kontratieff cycle and coming out of such economic slumps usually involves major global conflict. Governments’ power to print money may buy time but government resources are very finite, he says. Europe’s sovereign debt  crisis certainly shows that. From his view, people look at the economic issues but political risks are just as important.

Investing against political contingencies is very tough, though. For one thing, political events have a different time frame from most trading. Kontratieff  cycles are 50-to-70-year movements usually related to waves of technology—-some historical data suggests this pattern, going back centuries.

An investor that wants financial protection in case of a war could invest in military contractors and such. One major hedge fund investment in a military hardware supplier that I’ve noticed this year is Farallon Capital’s position in General Dynamics.

Farallon chief Thomas Steyer is no hawk. He is a well-known Democrat, donor to environmental causes and supporter of green energy.  His reason for buying General Dynamics may or may not be connected to geopolitics.

Another hedgie says the best you can do as a hedge against any risk is the same regardless of the nature of that risk—-hold more cash.

Mr. Tzanetatos says we’ll get out of the slump and jobs will recover—-but maybe in 15 years!

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