Portfolio hedging has relied on the same rules for decades, but as technology, geopolitics and the nature of trading undergo rapid change, hedging needs an update.
The old playbook assumed stable relationships: risk-off meant bonds rallied, “safe havens” cushioned drawdowns and diversification could be left on autopilot.
That assumption is proving unreliable. Rising leverage, shifts in global alliances, technological disruption and policy uncertainty underscore the need for resilient portfolios. Capturing long-term growth while preserving capital now requires more deliberate design.
Start with one of the most widely held hedges: high-grade bonds.
U.S. government bonds and investment-grade credit no longer automatically belong in a portfolio’s “low-risk” bucket. While they exhibit low volatility under normal conditions, their hedging power often falters during inflationary, fiscal, or liquidity-driven shocks - as 2022 demonstrated.
The current environment features multiple risks that could disproportionately impact bonds. Ongoing fiscal expansion in the United States raises debt sustainability concerns, while threats to central bank independence and rising tensions between the U.S. and its trading partners could impact foreign appetite for U.S. debt.
Meanwhile, in credit, indices are becoming more concentrated as large tech firms issue bonds to finance massive artificial intelligence capital expenditures.
The implication here is not that bonds are unattractive, but that investors must be precise about the risks they are underwriting and realistic about how those risks may reduce bonds’ classic hedging ability when inflation and fiscal narratives dominate.
SAFE NOT STABLE
Another major change is that “safe haven” no longer means “stable.”
Gold is a prime example. Gold’s scarcity value and long-standing role as a store of wealth remain real, and its biggest buyers are still price-insensitive central banks. Since the Russia-Ukraine war in 2022, these official buyers have steadily increased their purchases.
However, gold’s volatility recently rose above 40, according to CBOE gold volatility index, which indicates a level higher than most major equity indices. That’s largely because gold’s over 200% rally since 2022 has attracted significant speculative interest.
The precious metal is familiar and trading in it has become more accessible, drawing in marginal buyers who are often more price-sensitive. While gold jewelry has long been a store of wealth in India, and Chinese households have long used bullion to diversify currency exposure in a country with a largely closed capital account, we’re now seeing increased participation from retail investors.
This is evidenced by the significant spike in exchange-traded funds’ gold holdings since 2024. This leaves gold more exposed to violent momentum swings - such as the 14% intraday selloff on January 30, the worst since the 1980s, which was followed by gold’s best one-day performance since 2008.
FROM DIRECTIONAL TO STATISTICAL HEDGES
When traditional havens fail, “set-and-forget” diversification breaks down, broad-based directional hedges can’t be relied on, and statistical hedges matter more.
Statistical hedges target assets with low or negative marginal correlation to a portfolio’s key risks, lowering volatility without necessarily sacrificing returns. Importantly, assets serving as a statistical hedge may appear risky in isolation, but not when part of a larger portfolio.
For example, Chinese stocks have increasingly acted as a hedge to U.S. equity risk. The two markets’ performance diverged sharply during the “DeepSeek moment” in early 2025, when a cost-efficient, open-source Chinese AI model forced investors to reassess U.S. tech dominance and valuation moats.
Over the next 12 months, Chinese equities benefited from three forces: a re-evaluation of its tech sector, stabilizing macro conditions and renewed policy support for the private sector.
MSCI China delivered a 28% return in 2025, versus 16% for the S&P 500, the best performance for the former, in both absolute and relative terms, in years.
Allocating to China should not be considered a bet against America, however. It’s more about hedging portfolio risk in a multipolar world that seems to be moving away from unchallenged U.S. exceptionalism.
FOCUSING ON REGIME SHIFTS
Statistical hedges, unlike classic hedges, require constant reassessment as macro regimes shift. Correlations are unstable and shock-dependent: what hedges a growth scare can fail in an inflation shock.
For example, energy was a decent hedge in 2022 because inflation and supply disruption were the key risks. But if we’re entering a period of oversupply in certain energy markets, that hedging ability may no longer hold.
Using a “macro regime lens” is particularly important in an AI-driven cycle that is unpredictable and vulnerable to sudden shifts.
Currently, the hundreds of billions of dollars in AI capex we’re seeing appear to be boosting global GDP, pulling forward demand for physical resources, and raising leverage. This trend may initially prove inflationary, but that could change if productivity gains arrive. Moreover, AI-related job losses could push central banks to ease even as resource constraints persist, potentially exacerbating the risk of disorderly inflation.
This is where copper could play a role. Typically considered a growth barometer rather than a hedge, copper faces structurally rising demand from AI and renewable energy investment, risking severe and prolonged supply shortages. Copper could thus benefit from the AI boom but also serve as a hedge against the tail risks of resource scarcity and disruptive inflation.
In the new hedging playbook, protection is designed, not presumed. One must break the reflex to label assets as “risk-on” or “risk-off.” An asset can be an effective hedge and yet be volatile, headline-grabbing, and profitable.
Investors will need to identify specific risks, select the hedges best suited to address them, and then constantly monitor the risk landscape. In a world of unstable correlations and violent macro regime shifts, diversification is now an active discipline.
Taosha Wang is a portfolio manager and creator of the “Thematically Thinking” newsletter at Fidelity International.