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TAIL RISK HEDGING: Creating Robust Portfolios for Volatile Markets by Vineer Bhansali

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4

Active Tail Risk Management1

In Chapter 3 we discussed one aspect of what we have called offensive risk management, that is, how using tail hedges in a portfolio might permit investors to increase returns and the right-side convexity of returns while also looking to mitigate the risk of large investment losses. We demonstrated that if the hedge is purchased at the right price, the portfolio with tail risk hedges might have a more attractive risk-return profile ex ante than a buy-and-hold portfolio. We also mentioned that active monetization of hedges may provide liquidity that might be used to purchase cheap assets in periods of crisis, thus further improving the ex ante long-term return potential of the portfolio, but we did not discuss monetization ...

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