Capstone Hedge Horizon Monitor
To help investors monitor the cost-effectiveness of hedging, Capstone has launched its Hedge Horizon monitor. The monitor provides a single metric designed to quantify the value of equity hedging, and represents the frequency of sudden and significant equity sell-offs required for a hedging strategy to be beneficial.
Monitoring the Value of Hedging: Introducing Capstone Hedge Horizon
The consensus is equity hedging is cheap, but just how cheap?
With the VIX dropping back to pre-COVID lows in 2024, there was much talk about how ‘cheap’ it is for investors to protect equity portfolios. But just how cheap? And even if hedging is cheap, is it cheap enough to be worthwhile? In an effort to apply some quantitative rigor, we introduce the Capstone Hedge Horizon metric as a way for investors to assess the relative attractiveness of hedge prices over time. Under this metric we find that some hedge costs have recently been at their cheapest for nearly ten years, and that taking an active approach to hedging can significantly improve cost-effectiveness..
Hedge Horizon:
Coverage Time Frame
With a larger number of years representing a less expensive hedging environment, Capstone's Hedge Horizon monitor represents how many years between sudden 20%+ equity sell-off events can occur while still allowing a hedge to break even, with actual events occurring more frequently meaning the hedge can be accretive.
| Strategy | Hedge Allocation | Latest Value |
|---|---|---|
The analysis provided by the Hedge Horizon monitor presents investment outcomes based on the underlying single strategies selected by the user in the tool and a larger universe of liquid hedging strategies being tracked for the dynamic active quantitative hedge basket.
The Hedge Horizon monitor is constructed based on current pricing, stress scenario simulations, historical probability distributions of equity sell-offs, and hypothetical quantitatively constructed dynamic baskets of strategies, in the case of some hedge selections. The results are dependent on stress simulations and the quantitative dynamic active basket selection, in the case of some selections, which are model dependent. All models may be incorrect. Results may be different with different stress simulations or active basket results. Results are variable depending on the inputs chosen and provided by the user. Information and data used by the Hedge Horizon monitor is updated monthly and therefore can change with each use and over time.
The analysis provided by the Hedge Horizon monitor presents investment outcomes based on the underlying single strategies selected by the user in the tool and a larger universe of liquid hedging strategies being tracked for the dynamic active quantitative hedge basket.
Other investments not analyzed by the tool might have similar or better results. The outcomes presented by the Hedge Horizon monitor are hypothetical and do not represent real investment results or the results of any portfolio or specific investment managed by Capstone. Additional information or questions regarding the information presented through the use of this tool is available upon request.