Crisis Hedging with Futures Momentum and Equity Quality

Summary

This report surveys hedging choices for U.S. equity portfolios during drawdowns and recessions, drawing on a historical sample from 1985 through 2018. It contrasts rolling index puts and short credit risk with Treasury and gold exposures, then examines time-series momentum across futures and forward markets and long equity quality factors. The reported analysis finds that puts performed positively in all eight identified equity selloffs but were expensive over the full sample. Faster momentum signals and several quality measures were more promising during difficult equity periods, while a portfolio mixing momentum, quality, and the S&P 500 could improve adverse-period returns in the reported simulations.

The evidence is conditional on the study’s crisis definitions, data, and portfolio construction; the report does not show that any hedge will work in every crisis. Equity-constrained momentum improved crisis performance at a cost to overall returns, and quality’s crisis behavior may partly reflect negative equity exposure. The text emphasizes implementation costs and the value of combining defenses, while also warning that a strategy that helped in past episodes may fail when the drivers of a future shock differ.

Key ideas

• The report evaluates passive and active hedges across historical equity drawdowns and recessions.
• Rolling puts were effective in the identified selloffs but incurred substantial long-run costs.
• Faster futures momentum and long quality exposures showed favorable performance in many crisis periods.
• Restricting equity exposure may improve crisis protection while reducing returns in ordinary periods.
• Momentum and quality may complement each other, but their historical results are not universal guarantees.

Tags

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