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Universa Investments run by Mark Spitznagel popularized the idea of portfolio insurance (also known as tail hedge) protecting the investor against severe market declines (tail risks). By using this tail hedge, the investor can increase their share in riskier assets (stocks) while bringing the total risk of the portfolio down.

In my understanding, a retail investor can implement a tail-hedging strategy by purchasing deep OTM SPY puts. How exactly is this achieved? How to estimate the number of puts and how to rotate them? How much of capital should be allocated to this tail-hedging strategy? Or maybe it is easier to purchase a ready-to-use solution (e.g., ETF)?

Thanks in advance for your help. The question was intended to be broad.

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    $\begingroup$ I DO NOT endorse such products, especially not now, but here is an interesting link about one tail risk ETF etf.com/sections/features-and-news/… $\endgroup$
    – nbbo2
    Commented Jun 1, 2020 at 17:14
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    $\begingroup$ @noob2 thanks for your input. I understand that one should not follow the herd and jump into a product like this after a major crash $\endgroup$
    – slava-kohut
    Commented Jun 1, 2020 at 20:38

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I'd echo @noob2 and add https://www.ivoletf.com/ for rates related vol/inflation hedge.

I think at some point there will be some ANT (active non-transparent) ETFs running a strategy similar to tail risk hedging. Paul Kim has recently filed downside/upside convexity ETFs, which may become more relevant in the future. As evidenced:

The option overlay is intended to add convexity to the Fund. If the market goes up, the Fund’s returns may outperform the market because the adviser will sell or exercise the call options. If the market goes down, the Fund’s returns may fall less than the market because the adviser will sell or exercise the put options. The adviser selects options based upon its evaluation of relative value based on cost, strike price and maturity.

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  • $\begingroup$ thanks for your input. What is meant by "convexity" here? $\endgroup$
    – slava-kohut
    Commented Jun 1, 2020 at 20:42
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    $\begingroup$ literally from the SEC page: Convexity in the Fund’s name is a reference to the mathematical term convexity. The Fund’s returns are intended to possess convexity because the relationship between the Fund’s returns and market returns is not designed to be linear. That is, if market returns go up and down in a linear fashion, the Fund’s returns are expected to rise faster than the market in positive markets; while declining less than the market in negative markets. $\endgroup$
    – AK88
    Commented Jun 1, 2020 at 20:55
  • $\begingroup$ thanks, makes sense. $\endgroup$
    – slava-kohut
    Commented Jun 1, 2020 at 21:01
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Just buying deep out of the money puts would technically be a tail risk hedge, but you won't get returns anywhere near those from Universa. Simply buying put option is too expensive and you will erode portfolio expected return over time. They do use options on the index, but also on volatility (the Vix, etc.) to get the convexity you want. But, in addition to the convexity component they also have carry stategies (selling call options, currency carry, momentum strategies, etc.) designed to consistently bring in income to help offset the cost of convexity. The combination of strategies is what makes the product, not just buying put options.

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  • $\begingroup$ You have knowledge of the long term returns from Universa? Bevause AFAIK they are not publicly available. $\endgroup$
    – nbbo2
    Commented Feb 1, 2023 at 11:07
  • $\begingroup$ I have seen Universa's long term returns for various implementations, which can vary by customer depending upon their objectives. As such, the strategies might vary slightly from client to client. My comments reflect the tail risk hedging strategies offered by large investment banks to professional investment managers, endowments, pension funds, etc, - and yes, I have seen their returns as well. $\endgroup$
    – IronMarshal
    Commented Feb 2, 2023 at 15:27
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Universa sells lots of butterflies (shorts in the body of the distribution) and buys wings to construct a tail strategy. add in dynamic hedging and you have the basics of the strategy.

Fat tails = more quiet times and make 99% of days in the markets irrelevant. So the body of the distribution can be sold.

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