Investors have engaged in extreme protection buying to shield portfolios from recent market turmoil, according to Deutsche Bank in its recent monitor of the hedge fund world.

Market turbulence of recent weeks, which has seen global equity indices fall into negative territory from their 2014 starting point, as well as produce a drop in bond yields, has been associated with “extreme protection buying” in equities from fearful investors, according to Deutsche Bank.

The German bank, in its monthly overview of hedge fund industry trends, said several indicators over recent days showed investors scrambling to shield themselves. The put/call volume ratio in US equity options spiked to extremes (98th percentile since 1995), while option volatility in the US stock market, as measured by barometers such as the VIX index, has spiked.

Last week, global indices fell amid heightened concerns of a recession in the eurozone, some concerns about US economic momentum and fears about the state of the Chinese economy. Added to this is the rising expectation that the US Federal Reserve has turned off the taps of quantitative easing. As of last Friday, the MSCI World Index of developed countries’ equities was down more than 2.5 per cent, for example.

In bond markets, Deutsche Bank said investor behaviour appears to favour a flattening of yield curves, with investors preferring longer-dated securities. Investors are short of the two-year and five-year segments, and slightly long of 10-year maturities and significantly long of maturities of 15 years or longer. Short positions – betting on a fall – in two-year bond futures are at their most pronounced since June 2007, the Frankfurt-listed bank said.

 Some of the latest market shenanigans had not happened by the time Deutsche Bank tracked hedge fund performance for September. In that month, the median global fund gained 0.1 per cent despite a 2.78 per cent fall in the MSCI World Index, which will be a welcome sign that hedge funds can deliver returns in a down-market.

CTA/managed futures continue to lead performance globally, with the median fund posting gains of 2.49 per cent for the month and 4.83 per cent for the year. CTA/Managed Futures and macro strategies posted median gains in the US of 2.42 per cent and 1.88 per cent, respectively, and also led in Europe, up 2.28 per cent and 1.10 per cent, respectively. These two strategies also posted the highest dispersion of returns.

Regarding overall leverage, the bank noted that the MSCI World 30-day volatility fell 23.41 per cent over the month, ending at 6.61 on 29 September. Both gross and net fundamental equity exposure decreased last month, ending at 2.83 and 0.69, respectively.