Article Author: Yao Xiong, Financial Strategy Analyst
Source: East Net
The year 2025 is expected to be another tumultuous and changeable year for the market. With Hong Kong promoting recovery and the cross-strait governments implementing expansionary economic policies in 2024, it is crucial to assess whether these policies will have any impact on the current economic recession. Additionally, with the incoming U.S. President Trump taking office in January 2025, the uncertainty surrounding Trump's trade policy with China will increase.
Therefore, regardless of the size of the investors, hedge assets are crucial for every stable portfolio. These assets can include gold, foreign currencies, short-term government debts, as well as the recently emerging Bitcoin and other major cryptocurrencies. Each asset class has its individual risk and return ratio.
Gold is the most popular hedge asset. Historically, in stable average growth, many investors, including governments, choose to hold gold as an asset. Generally a good inflation hedge, aside from the fluctuations in its own value, investors also need to be aware that the other risks associated with gold include the storage costs of physical gold bars and issuer risks of paper gold.
Short-term government debt is very popular in institutional client portfolios, as holding these debts to maturity typically provides sufficient returns to combat inflation. However, investors may need to be cautious of the credit ratings of the issuing countries as well as their interest rate fluctuations.
Investing in foreign currencies is another hedging method, and the risk of loss is significantly higher than the previous two assets. Currencies such as the Swiss Franc are favored due to financial and political stability, which gives the Franc a strong yet stable value that can be held when another currency depreciates due to lower interest rates or political instability. However, many factors will lead to currency fluctuations and changes in direction, making the use of this asset highly 'contextual' and requiring in-depth analysis.
Another newer asset class is cryptocurrency, which has been legitimized by most national regulatory authorities. Bitcoin was initially introduced as a hedge asset similar to gold, but also as a hedge against government and political risks due to its decentralized nature. The author believes that although Bitcoin has tremendous potential returns, this asset remains too volatile to be considered a hedge asset. Furthermore, with the intervention of regulatory authorities and the emergence of cryptocurrency-based products, political risks and issuer risks have been reintroduced to this asset, making it no longer suitable as a hedge asset.
Investors must remember to consider the advantages and disadvantages of each asset, as it is impossible to eliminate all risks when hedging; investors must be able to identify the risks within each hedge asset and apply them appropriately.
