Offensive Risk Management II: The Case for
Active Tail Hedging

Abstract

Bhansali and Davis define offensive risk management as the use of tail hedges in a portfolio as a way for investors to allocate more capital to risky assets and simultaneously reduce the risk of large investment losses. If the hedge is purchased at the right price, the portfolio with tail risk hedges may have a more attractive risk–return profile than a buy-and-hold portfolio. The authors show, in the context of the 80-year history of the Standard & Poor’s Index, that intuitive rules of thumb for monetization can be justified and that the active management of tail hedges is consistent with the cyclical behavior of the economy and the markets.

TOPICS: Portfolio construction, tail risks, risk management