Smart(er) Investing by Elisabetta Basilico & Tommi Johnsen

Author:Elisabetta Basilico & Tommi Johnsen
Language: eng
Format: epub
ISBN: 9783030266929
Publisher: Springer International Publishing

Which is the strategy with the highest hedging efficacy?

None: In terms of hedging efficacy, no strategy produced positive returns during the worst single month or other drawdown periods. However, while the direct approach performed better during the worst single months, it did not in general perform during the protracted downturn periods. Over the seven worst equity drawdowns, the average monthly outperformance of the alternative indirect hedges varied from +79 bps to +149 bps while the outperformance of the direct hedge was of +71 bps. Outside of the worst drawdown periods, direct hedging detracted the most out of the four strategies. In fact, over the full sample, direct hedging cost 233 bps–448 bps more per year without delivering more protection during the worst drawdown. In terms of Sharpe ratios, all of the three indirect hedging strategies improved it compared to the traditional 60/40 and the direct hedge had a lower ratio. Apparently the payoff to direct insurance is short-lived since options become more expensive during a crisis.

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