A United States default if the debt ceiling isn’t raised is one scenario that a portfolio simply cannot be hedged against, according to portfolio managers speaking to the Alternative Investment Management Association (AIMA) Canada in Toronto on Thursday.
“If the U.S. government defaults, how do you hedge that?” said Noah Blackstein, vice president, portfolio manager, Dynamic Funds/GCIC Ltd., who spoke as part of a panel discussion. “There’s no way to hedge it. It’s actually unfathomable that they’re actually discussing it.”
The problem, according to Blackstein, is that banks all over the world will collapse if the U.S. actually defaults on its debt. Even to attempt to hedge a portfolio, with an over-the-counter derivative for example, won’t work, he said, because all tier one capital will be worthless as a result of the default.
Zach George, co-founder, principal, FrontFour Capital Corp., who also spoke as part of the panel, agrees that it’s not possible to hedge a default situation. “We’ve been going through a white-knuckle couple week period.”
Yet despite the concern, the chances of such as doomsday scenario becoming a reality is slim, according to the portfolio managers.
“I think as of today we probably have a deal,” said Blackstein, “at least an extension.”
Even with a resolution, this is unlikely to be the last time that a possible debt situation, or other catastrophe, is on the horizon. Said George: “I think the world is going to be in more dangerous crises in the future not less.”