长尾对冲(二)An Alternative Approach to Risk Management

由于国内衍生品合约以及交易工具的缺乏(股指期货,上证50ETF期权等),因此许多的系统性风险(systemic risks)使得部位中(Positions)出现的风险敞口(Risks Exposures) 无法得到对冲.


长尾对冲(一)Tail Risk Hedging

This article proposes tail risk hedging (TRH) as an alternative model for managing risk in investment portfolios. The standard risk management approach involves a significant allocation to hiqh-quality bonds. However, this approach has historically reduced expected returns over the long term (see article here and PDF available here). Accordingly, it could be sensible to pursue an alternative approach by managing equity risk directly, rather than avoiding or reducing it – thereby allowing investors to maintain higher overall equity allocations, which tend to deliver higher expected returns.

本文提出尾部风险对冲(TRH)作为管理投资组合风险的替代模型。标准风险管理方法涉及对高质量债券的重大分配。然而,这种方法在历史上长期降低了预期回报(参见此处的文章和PDF文件)。因此,通过直接管理股权风险而不是避免或减少股权风险来寻求替代方法是明智的 - 从而允许投资者维持更高的总体股票分配,这往往会带来更高的预期回报。

But how can one manage equity risk directly? Answer: market timing…I know, I know…a bad word in the world of investing but hear me out.


Market timing has rightfully been associated with poor investment performance in many situations. In my view, however, much of this underperformance can be attributed to inefficient implementations that involve uncomfortable tracking error (i.e., watch markets continue higher from the sidelines).


Instead of making wholesale changes to a portfolio, a tail risk (a.k.a. black swan) strategy might only comprise a 1-5% allocation. However, these positions would embed significant leverage to amplify their impact. Like card counting in blackjack, these strategies should only be employed opportunistically (i.e., when markets are vulnerable to tail risk). Moreover, their risk/reward profile should be extremely asymmetric with limited downside but significant upside potential (i.e., measured in multiples instead of percent returns).


Interestingly, I believe equity derivatives markets (e.g., put options, VIX products, etc.) could offer attractive risk/reward opportunities due to price distortions resulting from the popularity of short-volatility products.(1)


Figure 1: Allocate Capital According to the Attractiveness of the Opportunity

Source: Aaron Brask Capital


Tail risk hedging (TRH) strategies are effectively geared to profit from significant market corrections. They may be used alongside, or to replace, traditional risk management strategies (e.g., diversification via asset allocation) where the core portfolios have a significant allocation to equities or other volatile assets. They may also be used on a standalone basis to speculate and profit from market corrections (think The Big Short). We briefly discuss various applications at the end of this article.


尾部风险对冲(TRH)策略有效地适应重大市场调整的利润。它们可以与传统风险管理策略(例如,通过资产分配实现多样化)一起使用或替代,其中核心投资组合对股票或其他易变资产进行重大分配。它们也可以单独使用,以推测并从市场调整中获利(想想The Big Short)。我们将在本文末尾简要讨论各种应用程序。

Before delving into the details of TRH strategies, I first discuss the traditional approach to managing risk within investment portfolios. I then explain some of the vagaries associated with the often ill-fated strategy of market timing.


It is worth noting the TRH strategies discussed here are based on the equity and equity derivatives markets. However, I have also made a comparison to some of the speculative credit derivative strategies used to profit from the collapse of the housing bubble approximately 10 years ago.



Diversification via Asset Allocation

The conventional approach to managing portfolio risk typically involves diversifying investments amongst various asset classes. If the assets are not perfectly correlated, this will naturally mitigate the impact of a significant decline in any one asset class. At the same time, it will also dilute the upside potential of higher growth asset classes.



For example, consider a standard portfolio comprised of just stocks and bonds. Stocks have historically outperformed bonds by a significant amount over longer time periods (i.e., multiple percents per year). So the performance of portfolios with larger allocations to bonds have tended to lag those with smaller or no bond allocations. Indeed, when looking at rolling 10-year windows since the start of the Great Depression, stocks outperformed bonds 84% of the time. Moreover, the windows where stocks lagged bonds for a decade or more were clearly clustered around periods where stocks started with extremely high valuations (like now). I discuss the drivers behind these historical trends in more detail in my Asset Allocation article.


Figure 2: 10-year Rolling Returns

Source: Standard and Poor’s, Federal Reserve Board, The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

资料来源:标准普尔,联邦储备委员会,结果是假设结果,不是未来结果的指标,也不代表任何投资者实际获得的回报。 索引是不受管理的,不反映管理或交易费用,也不能直接投资于索引。 有关构建这些结果的其他信息可根据要求提供。

Many investors (professional and retail) implement diversification via fixed asset allocations through time. That is, they maintain their percentage allocations to various asset classes via periodic rebalancing. This approach is fairly standard within the investment management industry. However, in some situations, I believe the fixed asset allocation approach might be better characterized by risk avoidance than risk management. Indeed, it systematically reduces stock exposures.(2)


This leads to the challenge of how to manage equity risk without having to avoid equities. One answer is to ensure the portfolio against market losses via put options. I discuss this and other strategies in the TRH section, but the bottom line is put options are very expensive and this typically results in a net-negative result over the long term (see here for a conversation on this topic). Another option is to step out of the equity markets at times when risks are high. This is known as market timing and is the focus of the following section.



The Painful and Rarely Successful Strategy of Market Timing

It is virtually impossible to pick the absolute tops or bottoms of markets, or as Wes says, “Unicorns don’t exist, and neither do high returns with low risk.” Asset prices are only loosely attached to their underlying fundamentals. There is a myriad of factor influencing this linkage between fundamentals and market prices. Here I discuss how the perceptions and competing interests of different investors result in a layer of noise around market prices and thereby make market forecasting more difficult. I also discuss several practical challenges to implementing marketing timing strategies.




Different Risk Profiles

Every investor has a different perspective and approach to investing. For example, younger investors may be more inclined to own stocks than older investors who have little appetite to risk put their retirement funds at risk. Moreover, every investor has a unique risk profile. Whether it is their natural personality or a particular investment experience (e.g., tech or housing bubble, scam or fraud, etc.), risk profiles are shaped by a variety of factors and can change through time.



Even when investors have similar risk profiles, they may interpret investments differently. There are competing investment philosophies (e.g., active versus passive), different investment and valuation models, and every investor has a unique educational background with respecting to investing. Take evidence-based investing, for example. One might think that investment professionals who are dedicated to analyzing investments and strategies in a scientific manner would arrive at similar conclusions. This is not that case. Different people interpret the same data differently.

即使投资者具有相似的风险概况,他们也可能以不同方式解释投 存在竞争性投资理念(例如,主动与被动),不同的投资和估值模型,并且每个投资者在投资方面都具有独特的教育背景。例如,以证据为基础的投资。有人可能会认为致力于以科学方式分析投资和战略的投资专业人士会得出类似的结论。事实并非如此。不同的人对同一数据的解释不同。

Last but not least, emotions and behavioral biases can trump all of the data and analysis in the world. Whether investors are aware of their own tendencies or not, behavioral psychology has now become a major focal point for many investors, investment professionals, and academics due to its significant impact on investors. Given the inherent fickleness of human nature, this inserts yet another layer of detachment between fundamentals and market prices. Emotions are not based on rational thought but impulses and instincts. Accordingly, attempting to predict the emotional component of investor behaviors is tantamount to predicting irrational behaviors. While Dan Ariely (author of Predictably Irrational) might disagree, this is virtually impossible. Investors can change their moods in an instant and this injects additional noise into market prices.

最后但并非最不重要的是,情绪和行为偏见可以胜过世界上所有的数据和分析。无论投资者是否意识到自己的倾向,行为心理学现已成为许多投资者,投资专业人士和学者的主要焦点,因为它对投资者有重大影响。鉴于人性固有的变幻无常,这又在基本面和市场价格之间插入了另一层分离。情绪不是基于理性思考,而是基于冲动和本能。因此,试图预测投资者行为的情感成分等于预测非理性行为。虽然Dan Ariely(Predictably Irrational的作者)可能不同意,但实际上这是不可能的。投资者可以立即改变他们的情绪,这会给市场价格注入额外的噪音。

In a nutshell, market prices are subject to a broad spectrum of investor choices that lead to buying and selling decisions. It is virtually impossible to time with great precision when market perceptions or moods will change. For this reason, attempting to forecast the timing of major market turns can be a challenging endeavor.


In Practice

Even if one is reasonably competent in forecasting these seismic shifts in markets, it is still very difficult to successfully benefit from market timing. For example, many portfolios are taxable. So if an investor wishes to reduce exposures to equities, it will likely incur capital gains taxes. The precise amount of tax friction will depend upon the basis or unrealized gains embedded in an equity portfolio. For investors with tax-deferred accounts (e.g., 401K or IRA), this is a non-issue. Taxes aside, there will likely be transaction costs for selling existing positions (and rebuying them or other assets later). Given the low-cost brokerage options investors have today, these costs can be minimized.



A perhaps more important issue with market timing is the emotional toll it can take on an investor. I have already discussed the virtual impossibility of getting the timing perfect. Assuming one has pulled money out of equities, this means there would be a period where markets continue higher but the investor does not participate. This situation can create significant doubt and discomfort (also a potential source of premium). That is, being right but too early can result in the painful feeling of lost opportunity.


Between the challenges involved in profitably executing this type of market timing strategy and the potential emotional discomfort, it is no surprise this practice is frowned upon by many investors and investment professionals. Making wholesale changes to a portfolio is perceived as an aggressive strategy – even if vindicated in the end. Thus it opens up the door to job risk as it requires an advisor to stick their neck out and invest differently. Status quo is much safer (for the advisor).

在有利于执行这种类型的市场时机策略所带来的挑战和潜在的情绪不适之间,这种做法在许多投资者和投资专业人士的赞同下并不令人惊讶。对投资组合进行批发变更被认为是一种积极的策略 - 即使最终被证明是正确的。因此,它为工作风险打开了大门,因为它需要顾问坚持不懈地进行投资。现状更安全(对于顾问)。

Tail Risk Hedging (TRH)

Whether one is reducing their equity exposure permanently via a fixed asset allocation or temporarily in the context of market timing, it affects the composition of the overall portfolio. However, TRH (a.k.a. black swan) strategies are typically concentrated within a smaller allocation comprising less than 5% of the overall portfolio. This allows one to retain 95% or more of their standard portfolio exposures. Specifically, this helps avoid the potential emotional rollercoaster associated with wholesale changes to the portfolio (i.e., reducing equity exposure and watching markets go up from the sidelines).



So how can such a small allocation help mitigate risks at the portfolio level? That is the $64,000 question. The obvious answer is that these positions would embed significant leverage to amplify their impact. While this is true, the real value of TRH strategies is derived from the efficiency with which they provide these leveraged upside payoffs. In other words, the cost side of the equation must be minimized relative to the upside. In my view, there are three primary factors driving this efficiency which I discuss below.


Precise Risk Targeting

When it comes to markets, there is a tremendous amount of noise relative to the underlying signal. For example, long-term US stock market returns have been around 10% but volatility has been almost twice as high – averaging just over 20%.

From a TRH perspective, capturing the noise of short-term market movements is not the primary goal. We want to identify and isolate the underlying signal we want to hedge – in this case being a large downside move in the equity market. This would not happen overnight; it would likely take the better part of a year or longer. In terms of tools for hedging, this would translate into options and derivative products with maturities of at least one year.


就市场而言,相对于基础信号存在巨大的噪音。例如,美国长期股票市场的回报率约为10%,但波动率几乎是其两倍 - 平均只有20%以上。

从TRH的角度来看,捕捉短期市场走势的噪音并非主要目标。我们希望识别并隔离我们想要对冲的潜在信号 - 在这种情况下,股票市场是一个很大的下行动作。这不会在一夜之间发生; 它可能需要一年或更长的时间。在套期保值工具方面,这将转化为期限至少为一年的期权和衍生产品。

There are other benefits related to using longer-term derivatives. For starters, multiple short-term options generally cost more than similar long-term options. However, the more important point, in my view, is that longer-dated derivatives also embed expectations about the future (e.g., implied volatility). That means we do not necessarily have to capture the entire downside move we are trying to hedge because our positions may capture changes in market perception as well. For example, consider a two-year at-the-money (ATM) put option. If the market started to correct, then we would naturally benefit from the downside move as the option would be further in-the-money (ITM). However, we would also benefit from the increase in implied volatility (higher probability of a larger payoff – assuming the put was not too far ITM).

使用长期衍生工具还有其他好处。对于初学者来说,多个短期期权的成本通常高于类似的长期期权。然而,在我看来,更重要的一点是较长期的衍生品也嵌入了对未来的预期(例如隐含波动率)。这意味着我们不一定要抓住我们试图对冲的整个下行动作,因为我们的头寸也可能捕捉到市场认知的变化。例如,考虑一个为期两年的平价(ATM)看跌期权。如果市场开始纠正,那么我们自然会受益于下跌趋势,因为期权将进一步在价内(ITM)。然而,我们也会受益于隐含波动率的增加(更高收益的概率更高 - 假设看跌期权并不太远ITM)。

Another factor in making hedges more precise is to avoid hedging unlikely outcomes. For example, if one thinks a correction of 50% is possible but not 75%, it would be sensible to purchase put options struck around 50% but then sell puts truck around 25% (i.e., strikes as a percentage of current market levels). However, if the intention is for a hedge to benefit from changes in market perception, one should be aware that the derivatives market may place a higher probability on what you view as unlikely outcomes.


Interestingly, derivative pricing models are essentially ignorant of fundamentals. That is, most pricing models are based on market price information (e.g., price and volatility). This can create opportunities  (Berkshire Hathaway’s put sale comes to mind) but can also impose challenges in the context of TRH strategies. It is important to be aware of these issues as they can make all the difference when it comes to successfully (profitably!) executing TRH strategies. Otherwise, it is very possible mark-to-market risk can translate into liquidity issues.



This section could arguably be integrated into the previous section in the sense that timing the strategy is the same as being precise but in the temporal domain. That is, you only hedge tail risk when it is present.



Consider the game of blackjack. If you are a skilled card counter, then you will size your bets according to the odds of winning based on the remaining cards in the deck(s). In the context of markets, you would only execute TRH strategies when markets were vulnerable to significant corrections. In my view, this is when valuations are very high (like now).


The insurance business provides another analogy; it is generally profitable business. What does this mean for an investor who constantly hedges their portfolios? Underperformance is likely as they are likely paying a premium for the insurance. However, if one is only opportunistically hedging, say, one-third of the time, then this translates into a significant reduction in the cost of insurance.

保险业提供另一种类比; 它通常是一项有利可图的业务。这对于经常对冲投资组合的投资者意味着什么?表现不佳可能是因为他们可能会为保险支付溢价。但是,如果一个人只是机会性地进行套期保值,比如三分之一的时间,那么这就意味着保险费用的显着降低。

It is also worth noting the derivatives markets have a tendency to price risk (options and implied volatility) according to trailing observations (realized volatility). That means the cost of hedging often will go up after the risk has surfaced but can be cheap when it is most needed. The bottom line is that it is sensible to the only hedge when risk is high.


The Cost of Certainty

Another dimension of hedging relates to how well a hedge must protect against a specific risk. For example, a put is a direct and structural hedge for broad market exposure. In other words, the payoff is formulaic. This leaves minimal, if any, uncertainty with regards to the risk being hedged.



For comparison, consider a hedge whereby one takes a long volatility position instead of purchasing a put. Given that volatility has historically been strongly correlated with market sell-offs, this would likely provide a hedge against market declines. However, the payoff is not formulaically linked to the percentage decline. In fact, it could be possible for a market correction to take place gradually without much volatility. In this scenario, the volatility position would not provide a good hedge whereas the put would have. I view this situation as unlikely and believe the correlation (market declines/volatility) will persist.


In my experience, the demand for puts as the crème de la crème of hedging tools results in a persistent price premium of these options. Accordingly, it may be possible to utilize a robust but not formulaic hedge at a lower cost. One should be careful in using such hedges and ensure their payoffs are very likely to correlate with the risk being hedged. If done sensibly, these probabilistic (i.e., non-formulaic) hedges may be more efficient and thus provide a potentially higher upside relative to their costs.


Potential Products for Tail Risk Hedging

Below I provide a brief overview of some of the more popular products that might be used for TRH strategies. I then summarize some of the general differentiating factors between these concepts.(3)



Puts: As discussed above, puts are the most direct hedge for insuring a portfolio against a market crash. There are puts available linked to a variety of popular investment indices (e.g., S&P 500 or Dow Jones Industrial Average) as well as the ETFs that replicate those indices. They are typically available across a wide spectrum of strikes and maturities. More customized puts (e.g., on a particular basket of stocks) are available in the OTC markets.


Delta-hedged options: While purchasing puts and holding them directly hedges against market declines, investors could also delta hedge their long options positions in order to gain long exposure to volatility. Readers interested in learning more about these strategies can read the appendix on volatility trading in my Zombie Market Primer article (blog post and PDF version). This is a strategy that is likely too technical for most investors to implement on their own. However, this is why the industry created products to provide volatility exposures that do not require the hassle of delta hedging.

德尔塔对冲期权(中性策略,对冲掉标的物价格变化速度对期权价格的影响):在购买看跌期权并直接对冲市场下跌时,投资者还可以对其长期期权头寸进行德尔塔的敞口进行对冲,以获得长期波动性。 对于大多数投资者而言,这种策略可能过于技术化而无法自行实施。然而,这就是为什么该行业创造产品以提供不需要三角洲对冲麻烦的波动风险的原因。

Volatility products: The Chicago Board Options Exchange (CBOE) has developed a variety of products based on volatility-based payoffs. There are futures which effectively provide linear exposure to the VIX at a future point in time. It is important to understand these products settle to a future value of the VIX which itself embeds future expectations of market volatility. In other words, investors who purchase or sell these futures are speculating on the difference between the current and future level of implied volatility as calculated by the VIX methodology.


There are also futures on realized volatility. Technically, they have realized variance futures (variance = volatility squared). These settle to the difference between the current level of implied variance and the actually realized variance.


Realized variance futures are very different from VIX futures because there is no further expectation baked into realized variance futures when they settle; they are determined precisely by the historical price data of the index. If volatility were to spike right before expiry, it may contribute very little to the payoff since it is just one day of realized volatility. On the other hand, expectations of higher volatility in the future would be captured by VIX futures since they settle to an implied figure (the level of the VIX at settlement) that might reflect expectations for higher volatility in the future based on the recent realized volatility.

实现的方差期货与VIX期货非常不同,因为当它们结算时没有进一步的预期被实现的方差期货; 它们完全由指数的历史价格数据决定。如果波动率在到期前飙升,则可能对收益贡献很小,因为它只是实现波动的一天。另一方面,VIX期货将对未来波动性较高的预期产生影响,因为它们将结算为隐含数据(结算时的波动率水平),这可能反映出基于近期实现的波动性对未来波动性较高的预期。

The other obvious and important distinction is that variance payoffs can provide much larger upside relative to volatility-based payoffs. However, there are also options available on the VIX which can provide additional leverage. Readers interested in more technical details may refer to my Zombie Market Primer article referenced above or my older but more technical article describing VIX products.


Product Dynamics

The payouts for the above derivative products are all different and offer investors a variety of choices for hedging (or other applications). Each product has advantages and disadvantages depending on one’s goals. It is important to understand both the ultimate payout at expiration and the potential mark-to-market impacts. The latter is critical for the many cases where derivatives positions are not held until expiration.



In most hedging applications, the value of the hedges decays through time unless the market declines or the potential for a decline has increased. The rate of decay is linked to the amount of time until the expiration and the potential upside for the payout. More time means more things could happen (i.e., more time for risk to the surface). This generally translates into more expensive hedges (e.g., 1-year put versus 1-month put).


Intuitively, one might think of risk as scaling with the square root of time. If you look at the price of one-year versus 4-year ATM puts, you will likely see the latter is approximately twice the price of the former (square root of 4 equal 2). I am leaving out some details (forward versus spot ATM, volatility surfaces, money-ness, etc.), but this is a fair characterization of risk scaling. Indeed, if you look at most derivatives pricing formulae, you will see volatility parameters followed by the square root of time (e.g.,  or ).


While longer expirations may be more expensive on an absolute basis, they are typically cheaper to carry. This is because each day that passes is relatively less impactful for longer expiration products. This should be evident just by observing the single day passing as the percentage of time that is lost. However, it is deeper than that. If you assume risk scales with the square root of time and plot it on a chart with time on the x-axis, then you will see how the curve accelerates toward zero when moving from left to right. Technical details aside, the bottom line is that longer expiration derivatives can be cheaper to hold. This is a critical consideration when executing TRH strategies and balancing potential upside with costs to get the most bang for your buck.



Consider the scenario where I hedge with 1-year ATM put options on the SPY ETF but roll it every six months (i.e., when the 1-year option has become a 6-month option). Moreover, let us assume markets uneventfully move sideways over the six months. Based on my rudimentary risk scaling approximation above, this 1-year ATM put option will lose approximately 30% of its value of those six months (square root of one minus the square root of 0.5). Looking at current pricing (as of 2:52 pm EST September 7, 2017), mid-market prices for approximately 1-year and 6-month ATM puts are $14.27 and $9.05, respectively. This indicates a decay of 37% in the price of the option over those six months. This is not exactly the 30% I estimated, but in the right ballpark.


考虑我在SPY ETF上对冲1年期ATM看跌期权的情况,但是每六个月进行一次滚动(即1年期权变为6个月期权)。此外,让我们假设市场在六个月内平稳地横向移动。根据我上面的基本风险比例近似值,这1年期ATM看跌期权将失去其六个月价值的约30%(平方根除以0.5的平方根)。从目前的价格来看(截至2017年9月7日美国东部时间下午2:52),大约1年期和6个月ATM点的中间市场价格分别为14.27美元和9.05美元。这表明该期权价格在这六个月内贬值了37%。这不是我估计的30%,而是在正确的球场。

On the flip side, we can use a similar approximation to figure out what the breakeven for volatility would be in such a scenario. That is, in order to compensate for the loss in time value, how much higher would volatility have to go to breakeven? The current implied volatility for the 1-year ATM put option is approximately 15%. All else equal, the 37% loss due to time decay would require volatility to increase by a factor of 1.59x (1 ÷ 63%) to just about 24% for breakeven. However, all else is not equal. If volatility were to rise significantly, it would very likely involve a market decline which would further increase the value of the put option. Accordingly, the 24% breakeven for implied volatility is a very conservative (high) estimate.


The Big Short: A Comparison

In my view, equity derivatives markets can offer compelling opportunities for TRH strategies. For a variety of reasons I have highlighted in previous articles, investors have elevated valuations for US equities. In my view, this alone provides an impetus to look at risk management or hedging strategies. However, the cost of hedging has also been artificially dampened due to the popularity and self-perpetuating nature of low- and short-volatility strategies.


在我看来,股票衍生品市场可以为TRH策略提供令人信服的机会。 由于我在之前的文章中强调的各种原因,投资者对美国股票的估值升高。 在我看来,这仅仅是推动风险管理或对冲策略的动力。 然而,由于低波动率和短波动率策略的普及和自我延续性,套期保值的成本也被人为地削弱。

For example, mid-market pricing currently implies the probability of a 50% collapse over the next year and half is about 3%. If one purchased the appropriate options at these prices and this (50% correction) occurred, investors speculating on this collapse would turn $3 into $100 – a multiple of 33x their original investment. However, mid-market pricing is not likely. Bid-ask spreads have widened since August of last year (when this article was originally published) and the cost of executing across the bid-ask spreads is approximately double. So this would cut the upside potential in half.  Suffice to say, execution is key for strategies involving less liquid instruments.

例如,中间市场定价目前意味着明年50%崩溃的可能性,一半约为3%。如果以这些价格购买了适当的期权并且发生了这种情况(50%修正),那么投机者猜测这次崩盘将使3美元变成100美元 - 这是原始投资的33倍。但是,中端市场定价不太可能。自去年8月(本文最初发布)以来,买卖差价已经扩大,并且买卖价差的执行成本大约是两倍。因此,这将把上行潜力减半。可以说,执行是涉及流动性较低的工具的战略的关键。

Notwithstanding execution issues, speculating specifically on a 50% decline is a risky proposition. Indeed, a decline of 49% might result in a zero payoff. Moreover, many TRH strategies would likely decay significantly before they paid off. So the payoff multiple might be applied to a smaller capital base (original investment minus time decay). In practice, payoffs could be higher or lower (and possibly a loss) depending upon the TRH strategy employed. On balance, even when taking decay and other variables into account, I believe tail risk is still underestimated by many derivative products and attractive opportunities are available where returns are better measured in multiples rather than percent.


Having said this, I do not believe the TRH opportunities highlighted above are as attractive as those found in the credit (derivative) markets prior to the credit crisis fully exploded. At the time, one could purchase credit default swaps on various investment-grade collateralized debt obligation (CDO) tranches for less than 50 bps per year where that price was fixed for five years. In other words, you could have risked $0.50 a year to earn $100 (if the CDO tranche went to zero) over a five-year period. While there could be some decay and mark-to-market risk, the potential payoff could be as high as 200x the original investment ($0.50 turned into $100). Even if it took five years and the value of the tranche only fell by 50% (i.e., a recovery rate of 50%), you still would have reaped a payoff multiple of 20x ($50 payoff ÷ $2.50 investment). In reality, the value of many CDO tranches did go to zero and the cost of protection was actually closer to $0.30 than $0.50 making for potential payout multiples as high as 333x.


The above multiples only refer to the ultimate payout. As mentioned above, it is also important to consider the mark-to-market perspective many investors experiences. Investors who viewed these strategies through the same prism they would use for most other investments were probably extremely uncomfortable. Indeed, observing a hedge fund decline by 10-20% typically earns the investment managers a few phone calls and meetings to explain the underperformance. However, with these CDO strategies, even 2-3 basis point changes in the CDS pricing could easily result in swings of greater than 20% depending upon the leverage employed. This is one reason it is important to understand the dynamics of TRH strategies and avoid getting caught off-guard. This mark-to-market pain was depicted by many of the hedge funds shorting CDOs in The Big Short (both the book and the movie).

上述倍数仅指最终支付。如上所述,考虑许多投资者经历的按市值计价的观点也很重要。通过与大多数其他投资相同的棱镜观察这些策略的投资者可能非常不舒服。实际上,观察对冲基金下跌10-20%通常会让投资经理获得一些电话和会议来解释表现不佳。然而,根据这些CDO策略,CDS定价甚至2-3个基点的变化很容易导致波动超过20%,具体取决于所采用的杠杆。这是理解TRH策略的动态并避免陷入失控的重要原因之一。许多对冲基金在The Big Short(包括书籍和电影)中缩短了CDO,描绘了这种盯市市场的痛苦。

In a previous article (post here and PDF version) I highlighted multiple parallels between our current situation and other periods of market distortion stemming from price-insensitive strategies (e.g., the housing bubble and CPPI strategies). The bottom line is that it is very dangerous to pursue superficial investment strategies based on their historical performance. Just as structured credit products wreaked havoc on the credit markets and CPPI strategies culminated in Black Monday (-20% in a day!), passive and other price-insensitive strategies may be increasing the risk in the stock market while at the same time pushing down the prices of products and strategies to hedge the risk.

在之前的文章(此处发布和PDF版本)中,我强调了我们目前的情况与源于价格不敏感策略(例如房地产泡沫和CPPI策略)的其他市场扭曲时期之间的多种相似之处。最重要的是,根据其历史表现来寻求表面的投资策略是非常危险的。正如结构性信贷产品对信贷市场造成严重破坏,CPPI策略在黑色星期一达到高潮(一天为-20%!),被动和其他对价格不敏感的策略可能会增加股票市场的风险,同时推动 降低产品价格和策略以对冲风险。



This article first highlighted the potential utility of TRH strategies versus traditional approaches to portfolio risk management (e.g., fixed asset allocations). I then discussed the factors I believe are critical to successfully executing TRH strategies. Lastly, I compared the current opportunities with those that were available in the period leading up to the credit crisis.


本文首先强调了TRH策略与传统投资组合风险管理方法(例如固定资产配置)的潜在效用。 然后我讨论了我认为对成功执行TRH策略至关重要的因素。 最后,我将目前的机会与信贷危机期间可获得的机会进行了比较。

I believe the historical performance and low price tags of passive strategies have attracted record magnitudes of assets and presumably been a major driver of the higher valuations. Moreover, the current popularity of short-volatility strategies are likely making TRH strategies cheaper to execute. In other words, I believe it is not only a good time to hedge, but the cost of hedging has been artificially dampened. On balance, I believe TRH strategies currently provide investors with attractive opportunities. Indeed, even those without equity risk exposure (e.g., total return investors or those who simply like asymmetric bets in their favor) may find TRH strategies compelling. I do not, however, believe these opportunities are as attractive as those available in the credit derivatives markets leading up to the collapse of the housing bubble.


TRH strategies are very complex and will often end up with polarized results. As highlighted in the disclaimer above, it is important to understand these strategies are speculative in nature. In particular, their success depends on the behavior of market prices – not fundamentals. Even if a strategy will ultimately be profitable, mark-to-market risks can make the experience painful and may result in investors abandoning the strategy at the wrong time. While I did not discuss it within this article, taxes are also relevant. Indeed, gains on many TRH strategies will be realized and thus trigger capital gains (sometimes short-term) taxes where applicable.

TRH策略非常复杂,往往会产生两极化的结果。正如上面的免责声明中所强调的那样,理解这些策略本质上是推测是很重要的。特别是,他们的成功取决于市场价格的行为 - 而不是基本面。即使策略最终会盈利,按市价计价的风险也会使经验变得痛苦,并可能导致投资者在错误的时间放弃策略。虽然我没有在本文中讨论它,但税收也是相关的。实际上,许多TRH战略的收益将会实现,从而在适用的情况下触发资本收益(有时是短期)税收。

Accordingly, I believe it is important for investors to understand the challenges involved with these strategies before executing them. Even then, I recommend limiting allocations to these strategies. In general, I would allocate no more than 5% of one’s overall portfolio or 10% of one’s equity allocation to TRH strategies.


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