Tail-Risk Hedging
Systematic positioning for low-probability, high-impact scenarios — typically via deep-OTM options, gold, USD, and Treasuries.
Definition
Tail-risk hedging accepts a small consistent cost (premium decay) in exchange for large convex payoffs in crisis scenarios. The classic 'crisis offset' portfolio includes deep-OTM SPX puts, USD upside calls, long gold, and long-duration Treasuries — though the last has worked less reliably since 2022.
Tail hedging is hardest to size: too little provides no real protection; too much bleeds returns.
Why it matters
Most institutional portfolios are implicitly short the tail; explicit tail hedging is the only reliable way to maintain risk budget through crisis.
Worked example
March 2020: 5% OTM 3-month SPX puts bought in February returned ~30× notional in 4 weeks. The cost over the prior 12 months was ~2% of NAV — net outcome was protective.
Frequently asked
What's the right tail-hedging budget?⌄
Are Treasuries still a tail hedge?⌄
What about volatility ETFs?⌄
Do tail hedges work if everyone owns them?⌄
Related terms
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