Rethinking Credit Hedging Under Real Stress
Credit hedging is often approved because it is familiar, auditable, and easy to defend within governance frameworks.
That does not mean it will protect portfolios when stress arrives.
Many credit hedges are designed around reporting cycles, index behaviour, and hedge effectiveness tests. Real credit losses unfold very differently – through defaults, restructurings, funding pressure, and liquidity constraints that cannot be solved with mark-to-market offsets alone.
Protection that appears effective in normal markets may fail to deliver meaningful outcomes when liquidity matters most. Basis risk widens, monetisation becomes difficult, and governance constraints force decisions at precisely the wrong time.
The real question is not whether credit risk has been hedged, but whether the structure in place can survive stress without creating new risks of its own.
Read the CIO Brief
Credit Hedging – Defensible Isn’t DurableFX Hedging Beyond the Roll