While many of you know me as founder of the renowned alternatives diligence and OCIO search firm MAS, my very first job was serving as a country analyst for the Federal Reserve Bank of New York. I have covered economic, policy, and geopolitical risk considerations for countries, and unfortunately my experience in these fields of study is also relevant today.
As an analyst of OCIO performance, I understand that most OCIOs avoid hedging strategies, instead relying on their diligent asset allocation models to build robust portfolios that will carry their long-term performance through market cycles. However, I would also recognize that any modest loss of alpha from hedging in a geopolitical crisis could actually reflect a disciplined approach to managing risk in crisis situations and, should the crisis worsen, the OCIO’s clients would at least be partially protected. The current crisis reflects one such scenario.
The Pessimist’s Case
First, I must say that I applaud the professionalism of our soldiers in dismantling Iran’s military infrastructure. It appears a critical oversight is how the emergence of low-cost drones magnifies the hazards of asymmetric warfare to other countries in the region. What I find most shocking is the extensive lack of preparation to protect these facilities from drone warfare. Sending $1 million missiles to intercept $25,000 drones is unsustainable. Ignoring the help offered eight months ago by the world’s experts in anti-drone warfare—the Ukrainians—is astounding. Moreover, there does not appear to be a strategy to neutralize the ability to attack shipping or respond in a timely manner when it happens, and energy assets are exceptionally vulnerable when attacked. The U.S. Navy may lack the ships to break the blockade, and I understand no U.S. Navy ships are in the Strait of Hormuz at this time. The 550-ship navy of 1990 has whittled down to about 280 today, most of which are committed to protecting aircraft carriers and allies. A big reason for the decline in ship numbers is the tendency of the U.S. Navy to sabotage its own shipbuilding programs with impractical designs and excessive change orders—that’s an entirely different topic of frustration.
I do not think the markets appreciate the extent of damage that has already occurred to critical shipping facilities that support energy and other commodity exports through the Strait of Hormuz, and the Iranian drones continue to attack. More than one-fifth of global oil production ships through the Strait of Hormuz. About a quarter of that can be diverted into a pipeline to the Red Sea, provided that the Iranian drones do not also compromise that facility.
It is difficult for Westerners to comprehend the stubbornness of theocratic and ideological governments. We can hope for a revolution in Iran but it looks like that may require a civil war. Chinese and Russian intelligence will notify Iran every time an aircraft takes off from a carrier or airport. I also see risk that Russia clandestinely supplies Iran both with Russian-made Shahed drones, with Iran claiming they are domestically made, and with antiaircraft equipment. Any ship transversing the Caspian Sea between Russia and Iran should be viewed with great suspicion. Drones will continue to harass shipping until each vessel has a properly-equipped Ukrainian-trained anti-drone crew aboard, and the U.S. Navy finds the resources to make a determined presence in the Persian Gulf.
Possible Exits
To be sure, good things can happen. Iran may agree to stop attacking neighbors. A sudden coup or successful revolution could occur, ending hostilities with the U.S. and neighbors. Iran and the U.S. might reach some sort of a ceasefire. The U.S. Navy may muster enough forces to defend shipping adequately.
Conversely, more bad things can happen. A surprise “operation spiderweb” with drones attacking a U.S. coastal city from a merchant ship is a possibility, according to the recent FBI warning for Los Angeles. Revenge is a powerful motivator, and after massive damage to Iran, expect the Iranian military to cherish launching every Shahid drone they can possibly smuggle in from Russia at their neighbors.
We are hopeful that the scenario we describe does not play out. However, scenario management is what hedges are for. One example of a partial hedge is to look at a 95%/85% put spread on the S&P 500 for six months costs 1.8%. We would be happy to see an OCIO explaining how they lost 1.8% in alpha to help protect against a 10% loss in this adverse scenario, and we think the next six months will determine the path of the war. More complex hedges covering direct and proxy/correlation hedges could offer smarter approaches toward managing global risks.
While the U.S. is an energy net-exporter, high oil prices will impact already-stretched U.S. consumers. Fertilizer prices will also rise globally, since Urea is also a major Persian Gulf export. Some sector effects likely include:
- Airlines could suffer acutely and the travel industry will suffer.
- Domestic shipping costs will rise sharply;
- Auto manufacturing will suffer;
- Energy services and energy will benefit further;
- The inflation prints will be discouraging;
- While technology will be relatively insulated, technology companies linked to U.S. consumers could be impacted.
It’s also important to consider that the United States is economically insulated relative to other countries. India, China, Japan, and South Korea, the biggest engines of Asia, are very dependent upon Mideast commerce. See for example the sharp declines of Indian and South Korean currencies already, down about 3% over the last month. The Global South is in far worse shape. There will be enormous domestic pressure on governments across the globe to get this war to stop. Only political malfeasance would see this conflict last a year, which is exactly the scenario that concerns us the most.
Conclusion
Long term investors typically hold consistent asset allocation policies and are unlikely to engage in hedging directly. For the most part, we support that approach. We do think however that downside risks are highly elevated right now. Buying a put spread could provide partial protection against theocratic-ideological inflexibility, while still allowing investors to capture most of the upside gains the markets would experience if a peace breakthrough occurs.
Important note: While we outline this scenario and identify a possible hedging strategy, we intend to provide education, not investment advice or recommendations, from our Briefings. Every investor should act only with the review and advice from their retained investment advisers and investment consultants.
Chris Cutler CFA
March 14, 2026