'Bonds will hedge you against nothing' in current market environment, famed investor Nassim Taleb warns

REUTERS/Shannon Stapleton
  • Nassim Taleb warned investors that bonds “have no upside” and “have run their course” in an interview with CNBC on Friday.
  • Taleb pointed to negative interest rates as reasons why investors can no longer count on bonds as a traditional hedge against market sell-offs.
  • In order to protect your investment portfolio, Taleb suggested stock investors need to have a tail hedge to protect against systemic risks.
  • Taleb is an adviser to Universa Investments, which runs tail-risk-hedge investment strategies and posted a 4,144% return in the first quarter.
  • Visit Business Insider’s homepage for more stories.

Famed investor Nassim Taleb warned investors on Friday that bonds “have run their course” and will no longer serve as a traditional hedge against a market sell-off.

In a CNBC interview, Taleb said due to negative interest rates, “bonds practically have no upside structurally.” Taleb said he doesn’t believe bonds can really have negative interest rates, and the Fed lost a weapon it had by dropping interest rates to near zero in response to the coronavirus pandemic.

Taleb suggested investors hold onto stocks for upside, and protect against downside by having a tail hedge. “If you don’t have a tail hedge, I suggest not being in the market,” Taleb said. Taleb added that uncertainty looms over the market due to increased printing of money by the Fed and lack of room to lower interest rates. And even in the scenario that the coronavirus pandemic calms down, consumers will remain cautious, which will negatively impact many industries, he said.


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Taleb said stocks can pick up if we enter an inflationary environment, but any inflation would be hyperinflation, not mild inflation. On the flip side, we may be in a state of continuous deflation. Because of these uncertainties, Taleb said investors need to have an investment portfolio that is conservatively positioned and hedged for both scenarios.

Taleb is an adviser to Universa Investments, which is a hedge fund that specialises in tail-risk strategies. These strategies tend to perform well when volatility unexpectedly spikes in the markets. Universa posted a 4,144% return in the first quarter amid the coronavirus induced market sell-off.

“You need to be hedged for these two states, which makes things very delicate and the first thing I would say is bonds will hedge you against nothing from here on,” Taleb concluded.

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