Global investors hit by stock and dollar losses rushing to hedge, but not with crypto

Global investors who spent years loading up on dollars and throwing them into S&P 500 and Nasdaq stocks are now taking heavy hits, after President Donald Trump’s fresh trade war policies sent both stocks and the dollar into a tailspin.

For the crowd in London, Paris, and Tokyo, what used to be an easy way to print money turned into a bloodbath almost overnight, according to a report from Bloomberg on Monday.

The old playbook was simple. Buy dollars, buy US stocks, watch profits roll in. American equities were killing it compared to home markets, and the rising dollar was like free bonus points.

Now, a 6% drop in the S&P 500 this year looks even worse when seen through foreign eyes – it’s a 14% loss when measured in euros or yen. The freefall, mixed with nonstop chaos from the Trump White House, has shaken the trust of global investors who once saw the US as the safest of safe bets.

Investors rush to hedge as dollar declines hammer portfolios

Even if Trump suddenly decided to reverse course on the trade wars, the last month has already exposed the brutal risks of betting everything on the US.

Many foreign investors are scrambling to shield themselves, loading up on currency hedges tied to their massive $18 trillion in American stocks, a stash that made up nearly 20% of all US equities at the end of last year.

Morgan Stanley and Bank of America are seeing a jump in clients desperate for protection against a falling dollar. Alexandre Hezez, chief investment officer at Group Richelieu in Paris, said his funds are now hedged to the maximum allowed, admitting, “Everything has been turned upside down.”

Hezez used to think hedging was pointless. The assumption was simple: if US stocks fell, panic would drive the dollar higher, offsetting losses. But that logic just got blown to pieces.

Today, hedging by foreign investors in US stocks stands at only 23%, a long fall from the nearly 50% level in 2020, based on custodial data from State Street. Bank of America strategists warned that if investors rush back to pre-pandemic hedging habits, it could mean adding another $5 trillion in covered exposure.

Traders trying to protect themselves usually dump dollars in forward markets. But the cost is brutal. For Swiss franc- and yen-based investors, the three-month hedging cost is around 4% annualized. Euro-based investors are paying more than 2%.

Hedging cancels out dollar drops, but also wipes away gains if the dollar bounces back, and the rolling cost cuts deep into returns. Options trading exploded too. Euro-dollar contracts are hitting new records, but the extra volatility has made hedging 15% more expensive for euro investors since the start of the year.

Some are just giving up on guessing. Fares Hendi at Prevoir Asset Management said trying to predict dollar moves isn’t worth it. His fund, which had crushed it when US stocks were flying, has crashed 18% this year. “Currency swings are something we just can’t predict,” Hendi said from Paris. “Trump doesn’t know, Powell doesn’t know, nobody knows how it will turn out.”

Others are warning not to panic yet. The US still owns the world’s deepest markets and some of its biggest moneymakers, with Alphabet posting nearly $80 billion in first-quarter revenue. And even though the dollar is scraping a two-year low, it’s still standing — barely.

The real question is whether foreign investors are finally ready to start pulling money out of the US for good. Allianz SE thinks it’s not likely. They argue there’s just nowhere else to dump that much cash. Allianz economists, including Ludovic Subran, wrote that $28 trillion in international holdings sit in US markets.

Even tiny movements could mess up exchange rates and global prices. Subran said, “If even a fraction of these assets were leaving the US, it would lead to even larger distortions in exchange rates and global asset prices.”

Meanwhile, the feeling is growing that the US magic may be fading. George Saravelos at Deutsche Bank said US exceptionalism has “already started to erode” and predicted the euro could climb to $1.30 by 2027, a number no one has seen for ten years.

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