This article proposes tail risk hedging (TRH) as an alternative model for managing risk in investment portfolios. The standard risk management approach involves a significant allocation to hiqh-quality bonds. However, this approach has historically reduced expected returns over the long term (see article here and PDF available here). Accordingly, it could be sensible to pursue an alternative approach by managing equity risk directly, rather than avoiding or reducing it – thereby allowing investors to maintain higher overall equity allocations, which tend to deliver higher expected returns.
