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Portfolio Manager Insights
Built for volatility: Protection that strengthens when markets decline
Rising market volatility increases the risk of sharper, less predictable equity moves. It’s in environments like these – when stability gives way to disruption – that a hedged equity strategy can demonstrate its true value, says Fidelity’s Eric Granat.
- Amid uncertain times, Fidelity Advisor® Hedged Equity Fund and Fidelity® Hedged Equity ETF, both options-based strategies, may be timely tools for defensive-oriented investors, as they seek to provide a degree of protection during periods of extreme market volatility, explains Portfolio Manager Eric Granat, who oversees the mutual fund alongside Zach Dewhirst and the ETF with George Liu, Shashi Naik and Anna Lester.
- Differentiating itself from peers, Granat notes that Fidelity’s offerings are intentionally built to become more defensive as market conditions deteriorate, “so protection works harder when investors need it most,” he says.
- “While many hedged equity strategies rely on option structures that can re-expose investors to downside after a set point, our approach is intended to add protection as markets move lower, helping to provide greater defense during sharp pullbacks.”
- Rather than trying to predict market turns, the strategies seek to maintain ongoing downside protection that is actively managed as conditions shift.
- When markets decline and volatility rises, the embedded hedge is designed to strengthen, helping cushion the impact of severe drawdowns that can derail long‑term investment plans.
- “We designed these products to become more defensive the more markets go down, which is one of their defining features,” Granat says.
- He explains that the strategies do not sell call options to fund their hedge, meaning they do not cap equity upside or trade away future growth potential. As a result, they remain positioned to participate when markets recover, differentiating themselves from many peers that sell calls to help pay for hedge protection.
- "As markets stabilize and recover, the portfolios can participate rather than being constrained by structural limits on gains," Granat adds.
- This framework may create modest drag during quieter or sideways markets, but that trade-off is intentional.
- Granat notes, “We accept that cost in exchange for maintaining protection through the most stressful market environments, when investor confidence is tested and emotional decisions are most likely.”
- He emphasizes that the strategies are not intended to sidestep every market fluctuation or outperform in all conditions. Instead, Granat says, they aim to focus their protection on more-meaningful market declines – typically around 5% or greater – because those are the periods when investors tend to be most vulnerable to emotional decisions that can compromise long-term outcomes.
- “They’re designed for the moments that matter most: when markets break and protection needs to step in,” he concludes.
Featured Fund
Fidelity Advisor Hedged Equity Fund (FEQJX)
For investors seeking capital appreciation with a measure of protection from market downturns.
FEATURED FUND
Fidelity Hedged Equity ETF (FHEQ)
Seeks capital appreciation.
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Sector funds can be more volatile because of their narrow concentration in a specific industry. Growth stocks can perform differently from other types of stocks and the market as a whole and can be more volatile than other types of stocks. Value stocks can perform differently than other types of stocks and can continue to be undervalued by the market for long periods of time. • Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. • Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. • In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation, credit, and default risks for both issuers and counterparties. • Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. • Floating-rate loans may not be fully collateralized and therefore may decline significantly in value. • The municipal market is volatile and can be significantly affected by adverse tax, legislative, or political changes, and the financial condition of the issuers of municipal securities. • The securities of smaller, less well-known companies can be more volatile than those of larger companies. • The funds can invest in securities that may have a leveraging effect (such as derivatives and forward-settling securities) that may increase market exposure, magnify investment risks, and cause losses to be realized more quickly. • Leverage can magnify the impact of adverse issuer, political, regulatory, market, or economic developments on a company. In the event of bankruptcy, a company’s creditors take precedence over the company’s stockholders. Although the companies that the fund invests in may be highly leveraged, the fund itself does not use leverage as an investment strategy. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry. In the event of bankruptcy, a company’s creditors take precedence over the company’s stockholders. Third-party marks are the property of their respective owners; all other marks are the property of FMR LLC.
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