Risk Mitigation Strategies
A dedicated portfolio sleeve specifically designed to protect the overall portfolio during severe market dislocations — also called tail risk hedging or crisis risk offset strategies.
These strategies cost money in normal markets (an insurance premium) but pay off dramatically in crisis environments like 2008 or March 2020. The debate is always whether the crisis protection justifies the drag on returns in good years.
Common risk mitigation strategies include systematic trend following (CTAs) which historically perform well when equities fall sharply, long volatility strategies (explicitly long VIX or options volatility), tail risk hedge funds (options portfolios designed to multiply in crises), gold (traditional store of value and crisis hedge), and long duration Treasuries (historically rally when equities fall).
Frequently Asked Questions
What are risk mitigation strategies?
Risk mitigation strategies are portfolio allocations specifically designed to protect during severe market dislocations — tail risk hedging, trend following, and crisis risk offset approaches that pay off when traditional assets decline sharply.
What strategies protect portfolios during market crashes?
Common crisis protection strategies include systematic trend following (CTAs), long volatility positions, tail risk hedge funds, gold, and long duration Treasuries — all of which have historically performed well during equity market selloffs.
Is the cost of risk mitigation worth it?
Risk mitigation strategies create performance drag in normal markets but can dramatically reduce losses during crises. The value depends on the institution's risk tolerance, liability profile, and ability to withstand drawdowns.
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