Tail Risk Hedging: Contrasting Put and Trend Strategies

Abstract

We summarize key research findings on risk-mitigating strategies and offer an overview of the strengths and weaknesses of regular index put buying (“Put”) and multi-asset trend following (“Trend”) as tail hedges. The two biggest questions we address are: (1) What is the long-term average return or cost, and (2) How reliable and efficient is the hedge in equity market tail events? We present empirical answers and discuss the economic rationale for each question. The common view that Put costs more but is a more effective tail hedge contains a kernel of truth but does not capture the full story. We will give a more nuanced picture, including practicality for investors, but in the end show the cost advantage favors Trend over Put.