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Tail Risk Hedging With Easy To Trade ETFs: A Comparison Of Recent Performance

Mar. 09, 2021 1:40 AM ETDRSK, NUSI, PSQ, RPAR, SH, SJB, SPD, SPUC, SPYC, SWAN, TAIL, VXX21 Comments
Elusive Value profile picture
Elusive Value
175 Followers

Summary

  • A market correction may have begun. Several exchange-traded products claim to provide tail risk insurance or attempt to inverse the performance of market indices.
  • How did they perform in the recent volatility related to bonds selling off?
  • We compare several types of products against a popular S&P 500 index ETF (SPY).

Real volatility appears to be back, brought on by selling off of US Treasuries in recent weeks. This means yields have gone up, putting pressure on growth stocks. The financial media has talked about a great rotation from growth stocks into sectors that have underperformed in the past year, such as energy and value stocks. While I agree with that approach, I want to see how well a hedged portfolio would have performed in the past few weeks and months.

Nowadays, there are several exchange-traded products investors may buy in order to protect their portfolios against a market crash or correction. One need not necessarily have a large fortune in order to invest with a hedge fund. Nor does one need to dabble in options or futures in order to perform these hedges. These are easy to purchase exchange-traded products (mostly ETFs), similar to buying stocks in their brokerage account. I have traded not only options and index futures, but also in amplified products such as volatility ETFs and 2X and 3X index ETFs. Those require very close monitoring and frequent adjusting of positions, unlike these hedging products.

However, just because they are easy to buy, does not necessarily mean they are good to buy. We should expect that hedging, similar to insurance, should cost some money that we don't usually get back. However, several of these funds performed very poorly during the March 2020 market correction brought on by the COVID-19 pandemic. These were the so-called Risk Parity funds - perhaps one of the most famous being Bridgewater's (Ray Dalio) Pure Alpha Fund II falling double-digit percentages, due to leveraged positions with stocks and corporate bonds correcting simultaneously.

On the other end, a hedge fund run by Mark Spitznagel, a protege of Nassim Taleb (author of "The Black Swan"),

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This article was written by

Elusive Value profile picture
175 Followers
I started investing right after the dotcom bubble crash. I am very interested in underfollowed stocks and special situations. Some screens and methodologies like Joel Greenblatt's Magic Formula and Hewitt Heiserman's Earnings Power Chart are what I use for long-term investing.

Analyst’s Disclosure: I am/we are long SPYC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I also own short-term positions in SQQQ and long call options on SJB.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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