Owning volatility is expensive - about 11%/ yr to hedge a stock portfolio. Since $VXX came out, this would have eaten your whole return. Meh.

In this thread I'll explore what I think are better, more delightful "negative risk premia"

1/ A visual of stocks hedged with $VXX

2/ Stats - Gearing - $.25 of $VXX to hedge your whole stock portfolio.
Hedge Cost: 11% per year
% Loss Hedged During 1%+ Down weeks / " Loss Coverage": 94%
Sharpe Ratio of Stocks Hedged with VXX (aka "Neutral Stock Sharpe"): .06
Outside of not using up much capital, VXX is weak.

3/ CADJPY, the FX pair trades with the S&P because Canada is a riskier /higher beta country than Japan. But unlike owning VIX, shorting CADJPY hasn't lost you money historically, partly bc when both Central banks are racing to print money. Stocks hedged with CADJPY have worked

4/ CADJPY Stats:
Gearing: 2.7x Leverage
Hedge Cost: +1% Per Year
Loss Coverage: 74%
Hedged Stock Sharpe: .74
So shorting $2.7 of CADJPY for $1 of S&P exposure has covered 74% of your losses while not really costing you anything (vs 11% a year for the 96% VXX coverage).

5/ Owning 20+ year Treasuries $TLT (or futures) while shorting Mortgage REITs (REM) intuitively is a great hedge for stocks bc when mortgage delinquencies kick in you get paid big time. Also the mREITs tend to be run with 9-12x+ leverage and periodically blow up.

6/ Long TLT short REM stats:
Average Leverage: 1.32x
Hedge Cost: +2.9% per year
Loss Coverage: 74%
Hedged Stocks Sharpe: .56

This hedge is great because it doesn't use much balance sheet if you use futures, as you're basically shorting someone else's over-leveraged portfolio

7/ Another favorite of mine is owning Treasury Inflation Protected Securities $TIP vs EM Local Currency Debt $EMLC. You get the negative beta of the EM currency plus the default risk and hedge your inflation risk. This worked well in both 08 (not shown) and Covid.

8/ Long TIP short EMLC stats:
Avg Leverage: 2.8
Cost of Hedge: +3.7%
% Loss Coverage: 76%
Sharpe Ratio of Hedged Stocks: 1+

This trade is less liquid and scalable, and EMLC can be hard to borrow- likely accounting for its superior tastiness. Still a favorite.

9/ Now let's talk about European equities. European banks are always blowing up while Switzerland is a safe haven. This allows you to hedge European stocks $VGK with a spread of Swiss Equities $EWL and European Banks $EUFN. Bill Hwang hates this one weird trick

10/ $EWL vs $EUFN stats
Avg Leverage: 2.3x
Cost of Hedging: +5.3%
% Loss Coverage: 63%
Sharpe Ratio of Hedged Stocks: . 8

Like the mReits this trade benefits when over leveraged participants do stupid things and then people pile into the safe haven. This is a general theme.

11/ A number of reasons I like trades like this:
1] Rates are low so leverage is cheap, making them easier to carry
2] People on annual pay cycles have been selling vol in stupid ways since time immemorial
3] They aren't negative drift and largely benefit from QE

12/ More on the last point. 2 causal reasons. A] if all Central Banks print at the same rate the forex pairs might move with stocks but go nowhere in aggregate. B] Central banks have a tendency to buy higher quality assets leveraged players are actually short, adding asymmetry

13/ There are countless negative risk premia - or asset spreads which tend to move with stocks but have negative expected value due to moral hazard or structural asymmetries. These are just a few. In an era of money printing and moral hazard, I think it's a great thing to explore