tHE INDUSTRY STANDARD UPDATE

More than the effect of market declines, history shows that the expense of hedging is often a greater risk to portfolio values. This is why TCM looked to move beyond inefficient continuous “hedging” with a uniquely efficient risk management strategy that seeks a better balance between market decline and hedge expense threats. While its dramatic potential during rare crisis declines tends to grab the spotlight, subtle but consistent expense management has actually been the major source of the strategy’s value since inception.

With hedges active at all times, traditional “hedged equity” strategies forfeit this benefit, often at substantial cost to their investors. For example, in the six and a half month bull run since November alone, industry standard (continuous, option-based) hedging has now cost investors between 13% and 16% (chart), a figure very likely to rise each day without a significant correction. Limited mainly to a few tense days in late April, TCM’s risk management expense over the same period has amounted to just 4% with near zero expense since exposure returned to 100% in early May.

*Cumulative Risk Management Effect, 11/1/23 - 5/15/24. All returns net of fees (Tactical Beta net of 1%) Source: TCM, Barchart.com. Click for larger image*

Not just a recent phenomenon, similar outcomes are commonly found throughout this system’s track record, with Tactical Beta outperforming its main hedged equity peers* in 75% of all rolling 6 month periods since inception by an average 17% net of fees. Given the historical frequency of non-crisis environments and the limited ability of industry-standard approaches to reduce hedge expense, this is no coincidence. *JP Morgan Hedged Equity (JHEQX), Swan Defined Risk (SDRIX) and Gateway Fund A (GATEX), three of the oldest and largest mutual funds with investment strategies that apply risk management strategies to the S&P 500 Index. Data as of 5/15/24.

TCM’s tactical risk management approach was designed to be prudent in the most common scenarios and productive during extreme ones. Outside of a rare low-volatility bear market in the first half of 2022, tactical VIX hedging has proven to be far more efficient than traditional risk management and as markets rise over time, more efficient risk management means higher portfolio values (chart). Until the next crisis begins, we will continue to focus on the risk that’s in front of us.