If a Strategic Asset Allocation is defined as an asset allocation to weather all investment environments and one which should be employed in the absence of any market views, it would appear that the 60:40 Equity:Bonds allocation fits this definition, given the persistence of such an allocation by real money investors.

If such an allocation is persistent and such investors are required to maintain full investment, would a tail hedge be a good strategic investment in light of the fact that asset allocations are being probabilistically driven but only one path of history is realized? It would appear that there is asymmetric risk in that a bad outcome could mean the end of the game, while an equally probable good outcome is only beneficial to such investors. It seems to have option like features and risks that an options based tail hedge would mitigate.

A tail hedge would be appear to be even more important if there are bubble like conditions. In an environment where both bonds and equities seem to be at extremes, and the Strategic Asset Allocation maintained, should both asset classes incorporate a tail hedge?

How could a multi-asset class option based tail hedge be constructed? What instruments would one use?


As a starting point, you might want to read "TAIL RISK HEDGING: Creating Robust Portfolios for Volatile Markets", by Vineer Bhansali (2013). The author runs a tail risk fund (LongTail Alpha) so you will at least get a practitioner's perspective.

[EDIT: I avoided saying more because your questions are very broad. If you want a "multi-asset class option based tail hedge", talk to your friendly neighborhood structurer and ask for a dual digi on SPX and CMT10!]

  • $\begingroup$ Thanks. I intentionally asked them broadly as I am trying to elicit some creative suggestions and possibly a wide range of potential solutions, rather than just "buy a put' type of answers. I have seen Bhansali's paper. $\endgroup$ – AlRacoon Sep 25 '20 at 20:32
  • $\begingroup$ I thought Bhansali was a movie producer, until I saw Offensive Risk Management: Can Tail Risk Hedging Be Profitable?, February 2010, SSRN 1573760 $\endgroup$ – noob2 Sep 26 '20 at 6:16

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