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Comparing Crisis Hedges: Trend Momentum and Quality Factors

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Summary

This review compares passive and active approaches to protecting U.S. equity portfolios during severe drawdowns and recessions. Its sample covers 1985–2018, including eight equity declines greater than 15% and three U.S. recessions. It discusses rolling S&P 500 put options, short credit exposure, Treasury futures, gold, futures time-series momentum, and long quality stock factors. The reported evidence suggests put options hedged every identified equity selloff but carried an annualized excess return of −7.4% across the full sample; Treasury hedging was inconsistent over longer history. Shorter-horizon momentum and several quality measures tended to perform better in equity crises, and combining the two active approaches may diversify hedge returns.

These are historical findings, not guarantees. Results depend on the selected crises, sample period, strategy construction, and implementation costs. The review notes that limiting equity exposure in momentum can improve crisis behavior while lowering overall returns; quality results may partly reflect negative equity exposure. It also cautions that crises differ, passive hedges can be costly, and the discussion does not establish a universally reliable crisis-proof portfolio.

Key ideas

  • The comparison evaluates equity hedges across eight major drawdowns and three recessions from 1985 to 2018.
  • Rolling put options protected against each identified selloff but had negative full-sample excess returns.
  • Treasuries and gold did not provide uniformly reliable protection across the full historical record.
  • Shorter-term futures time-series momentum and long quality factors showed more favorable crisis-period behavior.
  • Combining momentum and quality may diversify hedge exposures, though construction and costs affect results.
  • Historical crisis performance does not ensure protection in future market shocks.

Tags

EquitiesFuturesOptionsTrend followingFactor investingRisk management

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.