Great article and technical breakdown of Spitznagel and Nassim's strategy of tail hedging. I have been trying to understand this more clearly over the past few months after reading some of Nassim's books and you did an excellent job.
Running similar numbers myself, the only concern I have is that the article seemed to very quickly "gloss" over the numbers that would relate to the final paragraph about how “tail hedging” can actually be a major hindrance to overall performance. At 0.5% per month, you are cumulatively removing 5-6% per year from your portfolio per year.
According the some additional documentation, Spitznagel (or Tobin's) Q has been "historically high" or at least the same today as it was since 2011 (with some minor fluctuations).
I just don't see how this is an effective strategy if SPY has averaged 17% annual returns since 2011, yet this strategy is cumulatively giving up 6% per year. All for the total effect that when the bottom drops out (20% decline), you can effectively hedge "most" of your loss.
I may be making too many simplifications, but the 10,000 ft view makes it seem like a poor investment strategy.
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Jesse,
Great article and technical breakdown of Spitznagel and Nassim's strategy of tail hedging. I have been trying to understand this more clearly over the past few months after reading some of Nassim's books and you did an excellent job.
Running similar numbers myself, the only concern I have is that the article seemed to very quickly "gloss" over the numbers that would relate to the final paragraph about how “tail hedging” can actually be a major hindrance to overall performance. At 0.5% per month, you are cumulatively removing 5-6% per year from your portfolio per year.
According the some additional documentation, Spitznagel (or Tobin's) Q has been "historically high" or at least the same today as it was since 2011 (with some minor fluctuations).
I just don't see how this is an effective strategy if SPY has averaged 17% annual returns since 2011, yet this strategy is cumulatively giving up 6% per year. All for the total effect that when the bottom drops out (20% decline), you can effectively hedge "most" of your loss.
I may be making too many simplifications, but the 10,000 ft view makes it seem like a poor investment strategy.