Crisis hedge

Most systematic trading strategies are pro cyclical by nature. They perform best when markets trend higher and volatility remains contained. During broad market expansions, equity risk premia, momentum and trend following approaches tend to generate stable positive returns.

This analysis demonstrates how crisis hedge strategies can be identified, evaluated and integrated into a model portfolio using the Quantpedia Pro framework.

Pragmatic Asset Allocation is a systematic, multi-asset investment strategy designed to adapt dynamically to evolving market conditions. Rather than maintaining a static equity exposure, the model actively allocates capital across a diversified set of asset classes—including equities, bonds, commodities, gold, and cash-like instruments—using momentum-based signals and disciplined periodic rebalancing. The strategy’s primary objective is to deliver attractive long-term returns while materially reducing drawdowns during adverse market environments.

It has now been two highly volatile years since we first published our paper on PAA, making this an opportune moment to review the strategy’s performance over the past year.

In Understanding Gold, Claude B. Erb and Campbell R. Harvey examine gold’s enduring reputation as a safe-haven asset and contrast popular narratives with empirical evidence. While gold has preserved purchasing power over millennia—what the authors call the “golden constant”—this does not translate into reliable short- or medium-term inflation hedging. Gold’s volatility is comparable to equities, while inflation itself is far more stable, making gold an unreliable hedge over typical investor horizons. The key insight is that gold’s real long-run return is approximately zero, which is precisely what one should expect from a hedging asset rather than a growth asset.

Extreme market events, once perceived as statistical outliers, have become a central concern for investors. The persistence of sharp drawdowns and volatility spikes demonstrates that the cost of ignoring tail risks is not tolerable for long-term portfolio resilience. While diversification can mitigate ordinary fluctuations, it often fails when markets move in unison under stress. This makes explicit protection against severe downside events not just desirable but necessary. Tail hedging addresses this need by providing a structured defense against the most damaging scenarios, ensuring that portfolios remain robust when traditional risk management tools fall short. Using VIXY ETF, we will present and test a range of hedging strategies designed to protect portfolios under stress. By applying robust testing frameworks, we aim to evaluate how different implementations of VIXY ETF-based tail hedges perform across a variety of market environments, highlighting both their strengths and inherent trade-offs.