Tail Risk Hedging Strategies – What Is It? (Tail Hedge Examples And Backtests)

How can you hedge against huge losses from totally random and unpredictable events? How can you insure yourself from devastating losses that come out of the blue? This is what tail risk hedging strategies are all about. Tail risks in the stock market are hard to protect against, but in this article, we offer some ideas and clues. We look at different ways to potentially offset or neutralize tail risk in your stock portfolio.

Tail risk is often referred to as “fat tails” and it means that there are increased risks for rare events – more so than a normal distribution indicates.  We present you with six tail risk hedging alternatives: put options, foreign assets, cash, Cambria’s tail risk ETF, Ray Dalio’s All Weather Portfolio, and trend-following strategies.

In this article, we provide you with several examples of tail risk strategies and we provide you with several backtests.

However, tail risk is very hard to hedge against and it might cost money in the form of lower returns. We start by explaining what tail risk is: