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The Journal of Portfolio Management

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Monetization Matters: Active Tail Risk Management and the Great Virus Crisis

Vineer Bhansali, Linda Chang, Jeremie Holdom and Marcy Rappaport
The Journal of Portfolio Management November 2020, jpm.2020.1.181; DOI: https://doi.org/10.3905/jpm.2020.1.181
Vineer Bhansali
is the founder and CIO of LongTail Alpha, LLC in Newport Beach, CA
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Linda Chang
is director of infrastructure at LongTail Alpha, LLC in Newport Beach, CA
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Jeremie Holdom
is an economic research strategist at LongTail Alpha, LLC in Newport Beach, CA
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Marcy Rappaport
is director of client relationships at LongTail Alpha, LLC in Newport Beach, CA
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Abstract

The authors discuss monetization strategies for both left- and right-tail risk hedging to illustrate the potential benefits of active management of hedges. In particular, by including actual data from the sharp COVID-19 pandemic-related market correction and subsequent rebound of 2020, the authors quantify how monetization strategies have the ability to improve the performance of portfolio hedges. This extends previous work on active tail risk hedging published in this journal. The authors conclude that active management of tail hedging can result in significant increases in the efficacy of tail hedging.

TOPICS: Options, performance measurement, portfolio construction, tail risks

Key Findings

  • • Simple monetization rules designed as a function of the option price can result in the full or partial sale of a hedging position that has appreciated in price.

  • • Monetization strategies for both left-tail and right-tail risk hedging have the ability to improve the performance of portfolio hedges.

  • • Active management of tail hedging can result in significant increases in the efficacy of tail hedging.

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The Journal of Portfolio Management: 47 (2)
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Monetization Matters: Active Tail Risk Management and the Great Virus Crisis
Vineer Bhansali, Linda Chang, Jeremie Holdom, Marcy Rappaport
The Journal of Portfolio Management Sep 2020, jpm.2020.1.181; DOI: 10.3905/jpm.2020.1.181

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Monetization Matters: Active Tail Risk Management and the Great Virus Crisis
Vineer Bhansali, Linda Chang, Jeremie Holdom, Marcy Rappaport
The Journal of Portfolio Management Sep 2020, jpm.2020.1.181; DOI: 10.3905/jpm.2020.1.181
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  • Article
    • Abstract
    • WHY MONETIZATION MATTERS
    • HISTORICAL PERFORMANCE OF MONETIZATION STRATEGIES
    • MONETIZATION STRATEGIES IN THE COVID-19 GVC OF 2020
    • CONCLUSION
    • ADDITIONAL READING
    • ENDNOTES
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