PT  - JOURNAL ARTICLE
AU  - Attakrit Asvanunt
AU  - Lars N. Nielsen
AU  - Daniel Villalon
TI  - Working Your Tail Off: <em>Active Strategies Versus Direct Hedging</em>
AID  - 10.3905/joi.2015.24.2.134
DP  - 2015 May 31
TA  - The Journal of Investing
PG  - 134--145
VI  - 24
IP  - 2
4099  - https://pm-research.com/content/24/2/134.short
4100  - https://pm-research.com/content/24/2/134.full
AB  - Equities are the biggest source of portfolio tail risk for most investors. Our study compares two approaches for hedging the equity tails of a traditional stock/bond portfolio: (1) the direct approach, which uses option markets to hedge equity risk, and (2) the indirect approach, which instead uses active strategies in stocks and bonds to reduce the portfolio’s exposure to equity tail risk. Using data from 1985–2012, we find the direct approach provides more reliable protection over the single worst months, but those gains are eroded at a faster-than-average rate in the following months. In contrast, we find comparable performance between the two approaches over the worst multiple-month equity draw-downs, and meaningful outperformance for the indirect approach outside of those periods. Thus, for many investors, these indirect approaches may represent a better choice for capturing insurance-like returns at a lower cost.TOPICS: Equity portfolio management, tail risks, performance measurement