Adapting to Market Regimes with Timed Hedging

Peregrine Securities, 2014

36 Pages Posted: 22 Apr 2016 Last revised: 28 Apr 2016

See all articles by Emlyn James Flint

Emlyn James Flint

Legae Peresec; Department of Actuarial Science, University of Cape Town

Anthony Seymour

University of Cape Town (UCT)

Florence Chikurunhe

Peregrine Securities

Date Written: April 17, 2014

Abstract

We address a very topical – and to some extent, intractable – question: When should I hedge? By analysing South African historical market returns, we show that only a handful of extreme returns – which are well characterised by two simple quantitative indicators – can have a significant impact on portfolio performance. Motivated by this finding, we introduce a range of quantitative indicators grouped into separate return, risk and regime categories. We first outline a systematic process for creating a timed hedging strategy and then backtest how effective each of the proposed indicators are as hedge timing signals under real world market conditions. A total of 36 hedge timing indicators are tested using five common hedging structures. Detailed results and discussion are provided for each hedging structure. In general, the long-term timed hedge backtests show very promising results, producing timed hedged portfolios with returns as good or better than the index but with significantly lower volatility and tail risk.

Keywords: Hedge timing, moving averages, momentum, implied volatility, turbulence index

JEL Classification: C14, C22, C4, C5, G13

Suggested Citation

Flint, Emlyn James and Seymour, Anthony and Chikurunhe, Florence, Adapting to Market Regimes with Timed Hedging (April 17, 2014). Peregrine Securities, 2014. Available at SSRN: https://ssrn.com/abstract=2767427 or http://dx.doi.org/10.2139/ssrn.2767427

Emlyn James Flint (Contact Author)

Legae Peresec ( email )

15 Cavendish Street
Claremont
Cape Town, Western Cape 7700
South Africa
27117227556 (Phone)

HOME PAGE: http://www.legaeperesec.co.za

Department of Actuarial Science, University of Cape Town ( email )

Actuarial Science Section, University of Cape Town
Private Bag X3, Rondebosch
Cape Town, Western Cape 7701
South Africa
+27 21 650 2475 (Phone)

Anthony Seymour

University of Cape Town (UCT) ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

Florence Chikurunhe

Peregrine Securities ( email )

21 Main Road
Claremont
Cape Town, Western Cape 7700
South Africa
+27117227551 (Phone)

HOME PAGE: http://www.peregrine.co.za

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