After 2018, investors may be forgiven for questioning tail strategies.
Even with declines in more than 90% of asset classes that year, the Eurekahedge Tail Risk index finished with a 6% decline. Its sister index, the Eurekahedge Long Volatility index, mustered a mere 1% gain. This lackluster performance was realized despite 2018 being the most volatile year since 2011 in equities and, as Figure 1 shows, the realized volatility of 60/40 portfolios hitting the highest point since the financial crisis (nearly triple the average of 2017). With the dramatic reversal in markets in 2019, tail hedges have lost as much, or more, than they gained in the final quarter of last year. While that performance might be forgivable given the sharp recovery of markets, it raises the issue of sustainability of hedging and when to take some profits in the face of large equity moves.