AQR examines how investors should hedge extreme market downturns by comparing option-based protection with trend-following strategies. The paper challenges the belief that buying puts is the most effective hedge, arguing that long-term costs can outweigh benefits. It ultimately leans toward trend strategies as more efficient, despite less dramatic crisis payoffs.
Tail Risk Hedging: Contrasting Put And Trend Strategies
AQR
Antti Ilmanen
Research
16 Pages
Key Takeaways
Put Hedging Drag: Long out-of-the-money put strategies show persistent negative carry, costing roughly 2–4% annually, making them a significant long-term performance drag.
Trend Crisis Performance: Trend-following strategies delivered positive returns in most major equity drawdowns, including gains exceeding 20% during several historical crisis periods.
Cost Efficiency Gap: Over multi-decade periods, trend strategies exhibited near-zero or slightly positive returns, while put hedges consistently produced negative average returns across sample windows.
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