Cash Is a Better Hedge Than Bonds, Goldman’s Oppenheimer Says

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(Bloomberg) — Investors may be better off hedging equity portfolios with cash than bonds, according to Goldman Sachs Group Inc.’s Peter Oppenheimer.

The chief global equity strategist told Bloomberg TV that while bonds have acted as a good counterweight to stocks for the past 20 years, low interest rates have changed the equation with him predicting negative returns for bonds in the years ahead.

“I think as we move forward, given we are at record low bond yields, it is difficult to see the same kind of return,” he said in reference to historical bond performance. “Cash probably represents a much better way of hedging against an increased exposure to risk assets like equities.”

While much of Wall Street has been arguing for the death of the traditional 60/40 stock-bond allocation ever since the advent of near-zero rates, substituting bonds with cash is a less-touted strategy. In fact, it’s more often recommended investors eschew cash all together with rising inflation. Bridgewater Associates’ Ray Dalio often says “cash is trash.”

“Cash is really the one thing that is guaranteed to underperform inflation and to lose out to inflation,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors, by phone. “If that is the main concern and one of the catalysts for sending long-term rates higher, than cash is really a losing proposition.”

Still, Oppenheimer said bonds are not a particularly good hedge and called for more diverse geographical exposure. European equities, for instance, could be a good place for investors to find value as they currently trade at a record discount to their U.S. peers.

Goldman sees the S&P 500 gaining 9% to finish next year at 5,100, fueled by profit growth and a continued economic expansion. The figure is in line with historical averages but will be a slower grind after the U.S. equity benchmark gained over 25% so far this year.

©2021 Bloomberg L.P.

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