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Worried About a U.S. Stock Market Drop? Buy Alibaba Options.

Worried About a U.S. Stock Market Drop? Buy Alibaba Options.

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The Alibaba building in Beijing.


Gilles Sabrie/Bloomberg

China might be the best hedge for U.S. stocks.

Key Chinese indexes and stocks are outperforming their U.S. counterparts, and investor sentiment suggests that Asia might even emerge as an economic haven, as America and Europe are still struggling with the Covid-19 pandemic.

The

Xtrackers Harvest CSI 300 China A-Shares

exchange-traded fund (ticker: ASHR), a proxy for mainland China’s stocks, is up 18% this year, compared with 6% for the

S&P 500 index.

Shares of

Alibaba Group Holding

(BABA), one of China’s most important companies, are up 36% this year. Alibaba, given its broad scope, might just help investors insulate their portfolios at a time of unusual duress in U.S. history—acting in the role once occupied by fixed income when it was an effective offset to equity weakness.

When President Donald Trump surprisingly ended stimulus negotiations with a Tuesday tweet, U.S. stocks sank. Many Chinese stocks, notably Alibaba, held up.

Hedging U.S. portfolios with Chinese stocks, particularly Alibaba, might seem outlandish, but Susquehanna Investment Group, a top options-trading firm that seeks out noncorrelated U.S. equity investments, has significant China exposure. The secretive trading company owns a huge piece of ByteDance, the parent company of TikTok, that could be worth more than $15 billion. The investment would probably dwarf anything the firm’s partners have ever realized in a long history of extraordinary success.

Alibaba will never protect a portfolio the way traditional hedges, such as S&P 500 options, do, but Alibaba’s options premiums and stock price aren’t as distorted ahead of the bizarre U.S. presidential election. Trading volumes on the

Cboe Volatility Index,

or VIX, are stunningly anemic during the oddest trading year since the 2008-09 financial crisis, suggesting that investors have little faith that VIX derivatives will work as expected.

But

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