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

Campbell R. Harvey, Edward Hoyle, Sandy Rattray, Matthew Sargaison, Dan Taylor and Otto Van Hemert
The Journal of Portfolio Management July 2019, 45 (5) 7-28; DOI: https://doi.org/10.3905/jpm.2019.45.5.007
Campbell R. Harvey
is a professor of finance in the Fuqua School of Business at Duke University in Durham, NC, and an advisor to Man Group
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Edward Hoyle
is a senior quantitative analyst at Man AHL in London, UK
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Sandy Rattray
is the CIO of Man Group in London, UK
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Matthew Sargaison
is the co-CEO of Man AHL in London, UK
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Dan Taylor
is the co-CIO of Man Numeric in Boston, MA
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Otto Van Hemert
is the head of macro research at Man AHL in London, UK
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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? Hedging equity portfolios is notoriously difficult and expensive. In this article, the authors 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 because the post-2000 negative bond–equity correlation is a historical rarity. Long gold and long credit protection portfolios sit 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). The authors examine both large equity drawdowns and recessions. They also provide some out-of-sample evidence of the defensive performance of these strategies relative to an earlier, related article.

TOPICS: Equity portfolio management, options, risk management, performance measurement

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The Journal of Portfolio Management: 45 (5)
The Journal of Portfolio Management
Vol. 45, Issue 5
July 2019
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The Best of Strategies for the Worst of Times: Can Portfolios Be Crisis Proofed?
Campbell R. Harvey, Edward Hoyle, Sandy Rattray, Matthew Sargaison, Dan Taylor, Otto Van Hemert
The Journal of Portfolio Management Jun 2019, 45 (5) 7-28; DOI: 10.3905/jpm.2019.45.5.007

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The Best of Strategies for the Worst of Times: Can Portfolios Be Crisis Proofed?
Campbell R. Harvey, Edward Hoyle, Sandy Rattray, Matthew Sargaison, Dan Taylor, Otto Van Hemert
The Journal of Portfolio Management Jun 2019, 45 (5) 7-28; DOI: 10.3905/jpm.2019.45.5.007
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  • Article
    • Abstract
    • CRISIS PERFORMANCE OF PASSIVE INVESTMENTS
    • ACTIVE HEDGING STRATEGIES: TIMES-SERIES MOMENTUM
    • ACTIVE HEDGING STRATEGIES: QUALITY STOCKS
    • CAN PORTFOLIOS BE CRISIS PROOFED?
    • CONCLUDING REMARKS
    • ACKNOWLEDGMENTS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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