Crisis Risk Mitigation

In our latest Topics of Interest paper, we go back in time to find the worst periods in U.S. stock market history. Our mission is to gather evidence about the asset classes and investment strategies that would have best mitigated these painful drawdowns, had they been added to a hypothetical portfolio. We compare the amount of protection provided with the long-term cost, in terms of foregone equity return.

  • We find that most institutional investors already have an effective program of crisis risk mitigation in the form of a significant allocation to high-quality bonds.
  • For those wishing to construct an explicit crisis risk program, this alternative view of risk reveals the most promising candidates. These include Trend Following and Risk Parity strategies.
  • Conventional tail-risk hedging and precious metals allocations are also shown to be effective, but expensive.