In a tense international environment, geopolitical risks are once again at the forefront of investors’ concerns. But how can we measure their actual impact on the markets? And, more importantly, how can we effectively protect ourselves against them?
François-Xavier Chauchat, a member of the investment committee at Dorval AM, shares his strategic analysis alongside Sophie Chauvellier and Gustavo Horenstein, discussing volatility mechanisms and the hedging strategies to prioritize in this uncertain environment.
Geopolitical tensions, such as those we are currently experiencing, almost invariably lead to increased volatility in financial markets. In the case of the conflict between Israel and Iran, this increase has remained relatively contained, thus offering a window of opportunity to implement hedging strategies at a reasonable cost.
“Geopolitical risks” are frequently cited by savers and investors as key factors in their market analysis. But how exactly should we define this concept? And, more importantly, how should we prioritize the significance of the events in question?
In a seminal article published in 2022, Dario Caldera and Matteo Iacoviello propose a rigorous definition of geopolitical risk: “the threat, occurrence, or escalation of undesirable events—wars, terrorism, diplomatic tensions—that could disrupt the peaceful course of international relations. ” Based on this definition, the authors constructed a geopolitical risk index based on the number of mentions of these tensions in a selection of major English-language newspapers since 1985 (see Figure 1).
As in the 1970s—the Yom Kippur War in 1973, the Iranian Revolution in 1979—energy issues dominate, almost always linked to the Middle East. The invasion of Ukraine is a geographical exception, but not an energy one: it has profoundly disrupted Europe’s supply of oil and, above all, Russian gas. As for the attacks in New York, London, and Paris, their economic impact stemmed less from the public outcry they sparked than from potential retaliation against oil-producing nations.
One way to measure the effect of these events on the markets is the VIX index—sometimes nicknamed the “fear index”—which reflects the implied volatility of the S&P 500. When a geopolitical shock causes the index to rise above 300 (three times its average level), the VIX typically rises above its historical median (see Chart 2).
The current episode of tensions between Israel and Iran is notable for the relative calm in the markets (as of June 19, 2025): volatility has not exceeded 22, a level close to its historical average. Investors remain cautious but are not rushing to sell risky assets, as the conflict could remain contained and/or short-lived. It could even pave the way for positive prospects: a weakening of the Iranian regime would reduce regional risks (terrorism, maritime disruptions) and could, in the long run, facilitate the lifting of international sanctions. Iran, it should be noted, accounts for about 4% of global oil production and holds the third-largest proven reserves.
From a portfolio protection perspective, this context of limited volatility offers opportunities. All too often, major geopolitical events trigger a very rapid spike in volatility, which significantly increases the cost of hedging. This is not the case today, which has allowed us to implement a cost-effective hedging strategy that we believe is appropriate following the sharp market rally since early April. We have therefore initiated, across all of our flexible and diversified funds, a combination of put options on the Euro Stoxx 50, with the aim of providing partial portfolio protection. We chose the Euro Stoxx 50 because its sensitivity to oil prices is generally higher than that of other indices such as the S&P 500. Opting for an options strategy rather than reducing equity exposure allows us to remain well-invested should the conflict subside.
In this context, our Dorval Convictions fund (FR0010565457) is an excellent way to gain exposure to European equities without taking on all the risks. Indeed, this fund has three key strengths:
- 1. The ability to adapt to market conditions by proactively adjusting its equity exposure, which can range from 0% to 100% in European stocks.
- 2. A strategic view of investment opportunities based on the economic cycle. The highly experienced management team analyzes the economic and market environment to identify promising themes.
- 3. A balance between risk management and opportunity.
With a YTD return of 6.7% and a net equity exposure of 59% as of June 20, 2025, Dorval Convictions is an excellent vehicle to help your clients invest in European equities.
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Equity investments are subject to significant price fluctuations. Fixed-income investments are particularly sensitive to interest rate changes, and the fund may lose value if interest rates rise. The fund is exposed to specific risks, including discretionary management risk, capital loss risk, equity risk, market capitalization risk, market risk, currency risk, interest rate risk, credit risk, emerging market investment risk, risk associated with the use of financial derivatives, and sustainability risk. The capital invested is not guaranteed. You may recover less than what you invested.
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