The Best of Strategies for the Worst of Times: Can Portfolios be Crisis Proofed?

26 Pages Posted: 31 May 2019

See all articles by Campbell R. Harvey

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Edward Hoyle

Man AHL

Sandy Rattray

Man Group plc

Matthew Sargaison

Man AHL

Dan Taylor

Man Numeric

Otto Van Hemert

Man AHL

Date Written: May 17, 2019

Abstract

In the late stages of long bull markets, a popular question arises: What steps can an investor take to mitigate the impact of the inevitable large equity correction? However, hedging equity portfolios is notoriously difficult and expensive. We analyze the performance of different tools that investors could deploy. For example, continuously holding short-dated S&P 500 put options is the most reliable defensive method but also the most costly strategy. Holding ‘safe-haven’ US Treasury bonds produces a positive carry, but may be an unreliable crisis-hedge strategy, as the post-2000 negative bond-equity correlation is a historical rarity. Long gold and long credit protection portfolios sit in between puts and bonds in terms of both cost and reliability. Dynamic strategies that performed well during past drawdowns include: futures time-series momentum (which benefits from extended equity sell-offs) and a quality strategy that takes long/short positions in the highest/lowest quality company stocks (which benefits from a ‘flight-to-quality’ effect during crises). We examine both large equity drawdowns and recessions. We also provide some out-of-sample evidence of the defensive performance of these strategies relative to an earlier, related paper.

Keywords: Crisis hedge, Crisis alpha, Recessions, Flight to quality, Drawdown, Downside risk, Portfolio protection, Portfolio hedging, Insurance, Put options, Option-based hedging, Portfolio insurance, Futures, Trend following, Momentum, Quality, Profitability, Gold, Positive convexity, Safe-haven investments

JEL Classification: E32, E44, G01, G11, G12, G14

Suggested Citation

Harvey, Campbell R. and Hoyle, Edward and Rattray, Sandy and Sargaison, Matthew and Taylor, Dan and van Hemert, Otto, The Best of Strategies for the Worst of Times: Can Portfolios be Crisis Proofed? (May 17, 2019). Available at SSRN: https://ssrn.com/abstract=3383173 or http://dx.doi.org/10.2139/ssrn.3383173

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
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Edward Hoyle

Man AHL ( email )

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

Sandy Rattray

Man Group plc

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

Matthew Sargaison

Man AHL ( email )

Sugar Quay
Lower Thames Street
London, EC3R 6DU
Great Britain

Dan Taylor

Man Numeric ( email )

200 Pier Four Blvd
5th Fl
Boston, MA 02210
United States
617-897-7800 (Phone)

Otto Van Hemert

Man AHL ( email )

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

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