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The cost of consistent recession hedging is prohibitive and larger than the benefit you’d receive, because of arbitrage (if it was cheaper than risk, you could
by dannyw 7y ago
The cost of consistent recession hedging is prohibitive and larger than the benefit you’d receive, because of arbitrage (if it was cheaper than risk, you could invest risk free).
See: https://www.aqr.com/Insights/Research/White-Papers/Pathetic-Protection-The-Elusive-Benefits-of-Protective-Puts https://www.aqr.com/Insights/Research/White-Papers/Pathetic-...
If you could hedge a recession, we’d have no recessions :)
Hedging only works if you have short time durations (eg you wanna hedge specifically in October, because you have a big bill due then), or if you’re the one providing the hedge and capturing the Volatility Risk Premium.
- DenisM 7y agoI'm not looking for a blanket hedge though. "We Work" can have a built-in cushion against smaller recession events - long-term leases, being able to predict which percentage of short-term leases will dry up, cash reserves, some sort of counter-cyclical lease agreement (e.g. with repo companies), counter-recession marketing/education/etc program (e.g. "let's beat recession together by sticking together!" or some such). Where the hedge is coming in is making sure that the company does not end up upside down if recession hits harder than the built-in cushion can absorb. They could be buying 12 month S&P500 options on a rolling basis - buy a new batch every month as the previous batch expires. The idea is not to get paid each time SPY drops 5% down, but to get paid when it drops 35% down signaling an actual market crisis and have enough time/money to survive the hit. I don't know if it makes sense as I'm just making this up as a I go, but your criticism is selling the idea short. Ahem.