Downside protection, tail risk and timing - Sorry, the path of equities will have huge impact on costs and benefits

Tracking the CBOE put protection index (PPUT) against the SPX provides useful information on the cost and timing of hedging. The PPUT index tracks a 5% out of the money one-month put strategy rolled monthly. There is a clear drag with performance versus the index which should be expected given the strong equity returns until the March 2020 crisis. At that time, the value of the put protected equity exposure downside. The five year total return through mid-April 2021 was superior to an unhedged portfolio.

Nonetheless, the five year performance does not tell the full story if an investor decided to employ a put hedge strategy starting on April 1, 2020. In that case, there is a strong performance drag.

Hedging after the horse has left the barn will not give you the return profile received from holding the strategy during a financial crisis. Of course, this analysis is based on a single performance path. If equities did not have the strong positive run the cost of hedging would have been significantly less or even produce a gain. Unfortunately, hedging costs and benefits can diverge wildly from expectations.