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Investors look for insurance as U.S. bull market runs - BNP fund manager

SINGAPORE, Jan 22 (Reuters) - Asian investors with money in the U.S. equities market are unwilling to cash out their bets just yet - but some are beginning to buy insurance against a correction, according to a quant fund manager who advises clients on asset allocation.

U.S. stocks were the standout asset class of 2019, with low global bond yields helping to drive the benchmark S&P 500 index almost 29% higher for its best year since 2013.

That has left a lot of investors nervous about the rally ending but also reluctant to sell while it continues.

“It’s still the right asset class to be in, especially with bond yields quite low,” said Paul Sandhu, Asia-Pacific head of BNP Paribas Asset Management’s multi-asset quant solutions team, which manages $150 billion globally. “But we see a lot of tail risk.”

He rated a worldwide slowdown as his top concern and is advising clients to diversify by adding new assets.

“Japanese investors have been starting to look at different ways of protecting themselves from a downturn, without actually selling their equity investments,” Sandhu said.

One such strategy, he explained, is to buy options or straddles that protect against sharp price movements, or to use products that increase exposure to equity performance not correlated with the broader market.

An option contract, in basic terms, allows investors to sell a stock at a fixed price in the future, essentially putting a floor under potential losses or even a cap on gains. A straddle involves buying protection in both directions.

A recent rise in the implied volatility priced into stock market options to sell or buy at prices well off current levels indicated a pick up in such hedging, Sandhu said.

“It means that fear is starting to go up in the market.”

Nevertheless, the S&P 500 has already spent January logging fresh highs, even as risks from Mideast tensions to uncertainty on global growth have clouded the outlook.

Futures pricing suggested the index is poised on Wednesday to shrug off fears about a new Chinese virus sparking a global pandemic.

“It’s become like a black hole actually, absorbing everyone’s money,” said Sandhu. “The more you struggle to get out, to find alternatives, it just kind of pulls you back in, because it’s the best show in town.” (Reporting by Tom Westbrook and Vidya Ranganathan, editing by Louise Heavens)

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