Adapting to Market Regimes with Timed Hedging
Peregrine Securities, 2014
36 Pages Posted: 22 Apr 2016 Last revised: 28 Apr 2016
Date Written: April 17, 2014
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: Suggested Citation