Offensive Tail Risk Hedging1

Long-horizon investors traditionally have assumed that they need not purchase tail risk hedges against rare and severe events that can adversely affect their portfolios. Even when tail risk hedges are justified, they are interpreted as a cost that reduces the expected returns of the portfolio. Our experience over many years in speaking with investment officers suggests that their biggest challenge is convincing investment committees to commit to this cost and risk underperformance relative to their peer group. This defensive paradigm of portfolio hedges hides the fact that severe market crises (as in 2007 and 2008) create opportunities for investors who have access to liquidity. The purpose of this chapter is to ...

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