Enhancing global equity returns with trend-following and tail risk hedging overlays

Abstract

This paper demonstrates that overlaying a combination of trend-following and tail risk hedging strategies onto a global equity portfolio significantly enhances performance. These strategies are complementary. Tail risk hedging mitigates equity risk effectively during sudden market crashes, while trend-following supports equity during slower bear markets. By employing a portable alpha framework, the performance of a 100% global equity portfolio is compared with a Portable Alpha portfolio that retains full equity exposure (beta) while layering on trend-following and tail risk hedging strategies (alpha). The resulting portfolio returns remain largely driven by global equity but exhibit a large, positive, and statistically significant alpha of 0.25% per month after controlling for traditional equity factors and other asset class excess returns. Outperformance in absolute terms was strongest during periods of market turmoil, while the improvement in risk-adjusted performance was evident across the entire period.