Tail hedging solutions for uncertain times
J.P. Morgan Alternative Asset Management
September 2011
A number of recent market events
have highlighted the costly impact that
improbable or highly unlikely events
can have on investors’ portfolios.
The credit crisis in the United States
in 2008, the failure of financial
counterparties such as Lehman
Brothers in the same year, as well
as the debt crisis in Europe and the
associated political risk more recently
have prompted investors to seek ways
to protect their portfolios against
negative tail events, particularly those
that occur on the far left of the return
distribution.
As a result of this, we have recently witnessed increased
demand for protection and a profusion of “tail-hedging”
products, which may present challenges to potential investors
looking to build a hedging program. At JPMAAM we believe that
investors should carefully understand the risk factors when they
try to hedge their portfolios and consider the merits of such tail
hedging techniques, taking into account considerations such as
cost, timing/possibility of monetization and possible ‘crowding’
effect in tail hedges.
The emphasis of this paper is to discuss the main consider-
ations investors should take into account before engaging in a
tail hedging program. We will then spend some time focusing
on the different tail hedge alternatives available to investors,
with their respective pros and cons. We will conclude with
JPMAAM’s new hedging approach as well as potential institu-
tional implications.
Tail hedging solutions for uncertain times
Rationale for tail hedging and considerations
We believe it is important for investors to understand the
different risk factors embedded in their portfolio and the
sensitivity of their portfolio to different risks, such as equity,
credit, rates, etc. The traditional approach of purchasing put
options on indices (e.g. S&P 500) to protect against the
occurrence of a dramatic event has some important
limitations. Today there is an increasing number of investors,
spooked by the events of 2008–2009, who have flocked to
options as a way to hedge the tail. This has created high
demand for puts, resulting in a steady increase in price. As of
September 2011, for example, a 15% out-of-the-money put
option on the S&P 500 index expiring one year from today
would cost a little over 6%, a premium implying a break-even
rate of over 21%, which is very expensive by historical
standards and could be far beyond what many rational
investors would be ready to pay. At JPMAAM, instead of buying
a series of out of the money put options on indices, we more
appropriately analyse and disaggregate our portfolios on a
risk factor basis and we try to hedge out these specific risks.
Portfolio risk sensitivity Equity, credit, rates, etc.
Sizing approach Insurance budget vs. target level of protection
Return profile Attachment point, convexity, negative carry
Basis risk Risk of hedging failing to provide expected protection
Alpha Potential to outperform native index replication
Capital efficiency Reducing “cash drag”
Liquidity Ability to monetize mark-to-market gains
Counterparty risk Over-the-counter vs exchange exposure
Transparency Ability to monitor investment
It is important for investors to understand the different charac-
teristics of each of the different hedging techniques available to
them: return profiles, attachment points, convexity and negative
carry. Attachment points are the level at which protection starts
“kicking in”. For example, options have different strike prices
implying different levels of protection. The convexity of a hedge
is also a crucial concept for investors to grasp. Protection can
either be linear or convex. For example, in a linear protection
scenario, if the market is up +10% you could reasonably expect
your hedge to lose -10% and if the market is down -10% you
can reasonably expect your hedge to be positive approximately
+10%. In a convex tail hedging strategy you can expect your
hedge to be increasingly effective as the market sells off. For
example a sell-off of -10% could generate a return of +60% and
2 | Tail hedging solutions for uncertain times
a sell-off of -15% could generate a return of +150%. Negative
carry is another important consideration for investors. Negative
carry is the cost associated with hedging techniques. For exam-
ple, option based strategies have a negative carry which repre-
sents the time-decay of the option.
Basis risk is another factor investors should consider before
engaging in a hedging program. Basis risk is the risk of a
hedge not working, i.e. it is the risk that offsetting investments
in a hedging strategy will not experience price changes in
entirely opposite directions from each other. This imperfect
correlation between the two investments creates the potential
for excess gains or losses in a hedging strategy, thus adding
risk to the position. For example an investor may realize that
it is less costly to hedge a long position in IBM by buying a put
option on the entire S&P 500 (as opposed to sourcing the spe-
cific IBM stock to borrow and short it). This strategy, although
less costly, presents serious flaws as there is no guarantee for
the IBM stock to move in tandem with the S&P 500. So chang-
ing the basis of the underlying hedge may result in a hedge
that is not as efficient as initially anticipated.
The alpha component of a hedging strategy is another important
factor to consider. Some hedging strategies - such as buying and
selling options opportunistically and monetizing these options,
or some idiosyncratic short credit strategies – can offer alpha
and have the potential to outperform naïve index replication.
The capital efficiency of a hedging technique is another key
consideration for investors. Some hedging strategies, such as
short selling are “capital intensive” meaning investors have to
deploy USD 100 to get USD 100 of notional exposure. Option
related strategies on the other hand are more capital efficient
due to the implicit leverage embedded in option contracts. The
more capital efficient a strategy, the less capital needs to be
deployed to reach a certain level of notional exposure or pro-
tection. This reduces the “cash drag” on the portfolio, enabling
capital to be deployed more effectively towards other, poten-
tially higher yielding investments.
A consideration which is often overlooked by investors is the
ability to monetize mark-to-market gains. Hedge fund manag-
ers specializing in option trading have the ability to monetize
mark to market gains through a number of different tech-
niques. Examples of monetization techniques include:
• Selling actual put positions that have accrued value
• Not rolling into new positions over the course of the month
• Covering a portion or all of the position’s short delta
The first option, although theoretically feasible, is the most
difficult to implement in practice and its viability ultimately
hinges on the manager’s percentage of the open interest and
the width of bid/ask spread. The third solution which consists of
covering a portion or all of the position’s short delta by buying a
call option on the wider equity market is really the most tenable
short term actionable option as it can be accomplished in the
deep and liquid S&P futures market. The manager could also
cover the position’s short equity exposure by buying call
options, but this strategy is not risk free as it could lose money
in a scenario in which the market continues to fall, but implied
volatility comes in. This is particularly true if the manager is too
aggressive in covering their short delta without also selling
some of their options positions.
Counterparty risk (over-the-counter vs. exchange exposure) and
transparency are important factors to take into account when
analyzing the riskiness of hedging programs. Entering into over-
the-counter transactions could leave investors exposed to credit
risk of their counterparty in case of default and transparency is
key to enable the monitoring of the investors’ investments and
net exposure to risk factors.
Tail hedge alternatives
There are a number of tail hedging alternatives available for
investors who seek to protect themselves against negative tail
events, particularly those occurring at the far left of a return
distribution. We have classified these in passive (index),
bespoke/customized structures and active hedging strategies.
Passive (index) type of hedging strategies offer potentially
lower expenses via internal implementation and has the added
benefit of full transparency. On the other hand though, the
“fire and forget” strategy and the limited ability for dynamic
management are clear limitations for the strategy. For
example, an investor may start a hedging program with a view
to protect the portfolio against a given level of equity market
sell-off and buy a put option which is 15% out of the money.
Let’s assume that markets rally by 15% subsequently to the
purchase of the hedge. The investor following a passive
hedging strategy now holds a put option which is 30% out of
the money instead of the initial 15% out of the money, which
may offer a level of protection less than the one offered by an
active hedging strategy which would continuously roll the
hedge. In addition to this, a generic hedging strategy has the
added drawback of high basis risk, due to the fact that in most
instances the individual risk factors in the portfolio or
securities are hedged with broad indices or sector hedges as
opposed to individual hedges. The other pitfall of the strategy
is the lack of alpha potential insofar as there is a limited
possibility for monetization. An example of monetization could
potentially consist of selling an option that has increased in
value to realize the mark to market gain and lock in the profit.
The buy and hold nature of the strategy does not allow for
such active management.
Bespoke/customized structures offer a number of advantages
compared to passive hedging. The basis risk - or the risk of a
hedge failing - is reduced due to the tighter hedge and the costs
are easily quantifiable. The limitations of this approach are the
poor liquidity and limited monetization ability as these would
require sourcing potential buyers of protection during periods
of stress and during periods of wide bid/ask spreads. In addition
the bespoke nature of the approach tends to render the
strategy expensive and the investor is exposed to significant
counterparty risk.
Active hedging strategies offer the benefit of outsourcing
portions of the hedge to experts specific to each asset class.
Such experts utilize a network of dealers and are attuned to
asset class specific order flow information, allowing for
the  generation of alpha through security selection, dynamic
portfolio management, and transactional efficiencies. This
active management approach also tends to offer more
continuous protection via dynamic portfolio rebalancing. The
disadvantage for investors is the reduced control over the day
to day hedging program. The table below summarizes the key
pros and cons of the different hedging strategies.
Pros Cons
Passive (index)
Potentially lower expenses “Fire and forget” strategy—
via Internal implementation limited ability for dynamic
management
No alpha potential
Full transparency
Bespoke/customized structure
Minimum basis risk Poor liquidity, monetization
ability
Easily quantifiable cost/ Expensive
protection comparison
Counterparty risk
Active
Expert management specific Less control
to asset class
Potential for alpha through
security selection
More continuous protection
via dynamic rebalancing
Source: J.P. Morgan Alternative Asset Management. Opinions, estimates,
forecasts, projections and statements of financial market trends that are based
on current market conditions constitute our judgment and are subject to change
without notice. There can be no guarantee they will be met.
J.P. Morgan Asset Management | 3
Tail hedging solutions for uncertain times
JPMAAM’s approach to active portfolio
hedging
JPMAAM’s approach to portfolio hedging places a
premium on strategies which:
• Utilize asset class specialists
• Focus primarily upon equity (but also credit) sensitivity
• Offer convex, including out-of-the money hedges
• Add linear protection to smooth distribution
• Minimize basis and counterparty risk
• Focus on capital efficiency
We believe it is generally in the investors’ interest to outsource
the construction of optimal hedges to experts specific to each
asset class. For example, within the option arbitrage bucket we
have carried out due diligence on and selected managers who
have over a decade of experience not just in trading equity
options, but in specifically crafting positive convex tail positions
through equity options. These managers’ reputation and stand-
ing as a first call liquidity provider for desks and brokers with
downside options to lay-off allows for significant transactional
inefficiencies. Especially in very short dated out-of-the money
options, bid-ask spreads can be quite wide as a percentage of
premium expended; the ability to transact at mid market (or bet-
ter) can therefore prove highly advantageous. The managers’
expertise and flexibility to optimize the hedge along the term
structure can also be quite valuable. For example, the ability to
trade shorter-dated options can prove particularly cost-effective
during periods of an upward sloping implied volatility curve.
And  in addition to being more cost effective, shorter term
options are also more liquid and potentially easier to monetize in
a crisis.
On the equity and credit protection side, we tend to employ
specialists who have proven experience in shorting stocks and
credit managers who have a long and demonstrable experi-
ence in shorting credit. At JPMAAM we avoid generic hedging
strategies and prefer to employ managers who have an exper-
tise in their own field. For example, well diversified short sell-
ers can add alpha on their short positions by selecting individ-
ual, idiosyncratic stocks which are likely to underperform the
broader market. This strategy is very different than more
generic hedging strategies which tend to short the broader
market or sectors and thus offer negative beta (which is dif-
ferent than alpha). On the credit side we tend to favour short
credit managers that invest predominantly through credit
default swap (CDS) protection on investment grade bonds,
4 | Tail hedging solutions for uncertain times
high yield bonds, and credit indices.  Given the tightness of
credit spreads, the protection offered by shorting these credits
can be quite convex. For example, investment grade credit
spreads currently around 110bps can only go to 0 (historically,
investment grade has bottomed out  around the 30 level), but
could potentially move to 300 or higher in periods of market
stress and dislocation. The potential asymmetry of returns to
the upside in case of a market shock or a left tail event makes
this strategy extremely compelling.
One of the key differentiator in our approach to portfolio
hedging is the dynamic mix between convex and linear hedg-
ing strategies. We believe that combining convex and linear
hedging program offers an attractive payout for our investors.
The reason for this is that convex payout profiles tend to offer
greater capital efficiency and protection in severe tail events,
i.e. when “it hurts the most” whilst linear hedging strategies
smooth out the distribution of returns. In addition, mixing
these different hedging strategies provides us with the flexibil-
ity to change the mix depending on individual client situations,
embedded risk factors or utility functions. For example, inves-
tors may require different attachment points (i.e. threshold at
which protection is triggered) to protect against different
extreme scenarios or different levels of stress in the markets.
The combination of convex and linear protections help us
achieve these desired levels of protection while smoothing the
distribution of returns in the left shoulder and belly of the dis-
tribution as depicted in the graph below.
TARGETED PAYOFF PROFILES FOR GIVEN EQUITY MARKET RETURNS
Targeted payoff by strategy Targeted payoff: A closer look
at the “tradeoff”
Option Arbitrage Short Equity Short Credit Combo Hedge
400 20
Hedge strategy return (%)
300 15
Hedge strategy return (%)
200
10
5
100
0
0
-5
-100 -10
-20 -15 -10 -5 0 5 10 -4 -2 0 2 4 6
S&P 500 Monthly Return (%) S&P 500 Monthly Return (%)
Source: J.P. Morgan Alternative Asset Management, Bloomberg. Financial
information is as of April 2011. Combo Hedge represents approximately 22%
Option Arbitrage, 44% Short Equity and 33% Short Credit. Please see “Important
Notes” in the back of this presentation for more information. The above charts
are for illustrative and discussion purposes only. Payoff profiles are based on
forward looking projections and manager positioning. Actual results can vary
significantly based on factors such as market volatility, implied volatility skew and
credit spreads.
JPMAAM’s approach focuses on minimizing basis risk (i.e. the customized depending on individual investors’ requirements in
risk of a hedge failing) and counterparty risk.  We have a spe- terms of underlying instrument traded, exposure to predefined
cialized team within JPMAAM which specializes in analyzing risk factors, attachment points, efficiency of capital, potential
and understanding the financing arrangements of the manag- for alpha generation and possibility of monetization. In addition
ers with whom we invest. For example, the team analyzes combining different hedging strategies helps mitigate the risk of
International Swaps and Derivatives Association (“ISDA”) one strategy not working as efficiently as anticipated (e.g. short
agreements between hedge funds and their counterparties to sellers in 2008 due to regulatory restrictions).
ensure proper robustness of terms. In today’s environment of
A last consideration of importance is liquidity. Liquidity allows
declining liquidity and rising volatility, it is particularly impor-
investors to adjust the allocation and profile of the hedging
tant for hedge fund managers to obtain financing from the
program based on changing risk factors in the core portfolio.
strongest counterparties. In addition, their agreements with
For example, if long short managers trim significantly their net
these counterparties should offer competitive economic terms,
exposure, one could reduce the allocation to the hedging
should provide sufficient time and flexibility to manage
program to maintain the desire level of risk across the portfolio.
through difficult periods, and should not place the fund and
fund investors at undue risk. Managers who are proactive in
negotiating for the best terms will often have an advantage,
especially during the tougher times. They will have time to Institutional application
unwind certain positions if necessary, or equally as important,
JPMAAM’s tail hedging program could offer an attractive
to take advantage of mispricings that surface in the capital
solution for investors who look to hedge their portfolio against
markets by leveraging liquidity they have available that others
a number of left tail risks, while providing at the same time an
may not. In addition, we want to ensure managers have con-
efficient use of their capital. The graph below plots the
trols in place to understand the strength of their counterpar-
different level of monthly returns for the S&P 500 from
ties and have procedures in place to proactively move their
January 1997 through April 2011 and the bars show the
counterparty exposure should their counterparties weaken to
performance of the tail hedging portfolio during these
a level of concern.
months. For example, on the right hand side of the graph,
Another key differentiator in our approach is our constant focus there were 19 occurrences when the S&P 500 monthly returns
on capital efficiency. Capital efficiency is often overlooked by were between 6% and 9% over the period, and the proforma
most investors. Highly capital efficient strategies like convex Portfolio Hedge allocation returned an average monthly return
and option related strategies decrease the opportunity cost of of -3.3% during these months*. The blue line depicts the
hedge allocation and enable the deployment of capital to other, returns of an unhedged typical institutional portfolio (55%
return seeking asset classes/investments. Equities, 40% Fixed Income, 5% Hedge Funds). The orange
line depicts the returns of a proforma enhanced new hedged
The table below shows the core tenet of our investment strat- typical institutional portfolio with 2.25% Portfolio Hedge
egy. Combining hedging strategies with different characteristics allocation (0.50% Short Equity, 1.25% Option Arbitrage, 0.50%
can help create an attractive hedging payout, which can be Short Credit). The difference between the blue line and the
JPMAAM’s
orange line shows the impact of the 2.25% Portfolio Hedge
approach Allocation. The interesting observation is that the hedged
Option Short blended
arbitrage Short credit equity portfolio
* Typical Institutional Portfolio represents 40% Barclays Aggregate Bond Index,
Main Instruments Equity 20% S&P 500, 20% MSCI AC World Index Ex U.S. (LCL currency), 15% Russell
IC/HY CDS Equities Diversified
Traded options/VIX 2000 and 5% HFR Composite. HFR Composite reflects performance of HFRX
Attachment Point Moderately Global Hedge Fund Index from April 2003 onwards and HFRI Fund Weighted
Far out-of- At-the-
out-of-the Diversified Composite Index from January 1997 to March 2003. The MSCI AC World Index
the-money money
money Ex U.S. (LCL currency) reflects performance of the MSCI AC World Index Ex U.S.
Payoff Profile Moderate/ (LCL currency) from February 1999 onwards and the MSCI World Index (LCL
High Low Moderate
Convexity high currency) prior to February 1999. Data presented from January 1997 through
Capital Efficiency High Moderate Low Moderate April 2011. Portfolios are rebalanced quarterly. Enhanced portfolio allocation
Time Decay/ to Portfolio Hedge is funded pro-rata from Institutional Portfolio allocations.
Moderate High Moderate Moderate Please see “Important Notes” in the back of this presentation for more
Negative Carry
Alpha Potential Moderate High High Moderate information. The above charts are for illustrative and discussion purposes
only. Past performance is not indicative of future results. Returns are proforma
Monetization High Moderate Low Moderate and have not been experienced by investors.
Source: J.P. Morgan Alternative Asset Management. The above information is for
illustrative and discussion purposes only.

J.P. Morgan Asset Management | 5

Tail hedging solutions for uncertain times

portfolio only gives back a small portion of upside during The following graphs show the cumulative outperformance of
positive equity markets but dramatically outperforms the the hedged portfolio against the unhedged portfolio over the
unhedged portfolio during negative equity markets. January 1997-April 2011 period. The following graph (below
Interestingly as well, the sharper the market decline, the right) shows the difference in rolling 12-month returns between
greater the outperformance of the hedge portfolio. This is due the hedged and the non-hedged Institutional portfolios. The
to the highly convex nature of our Portfolio Hedge allocation. graph shows a net outperformance of the hedged portfolio
For example, the left hand side of the graph shows that there during the Asia crisis/LTCM debacle in 1998, the 2001 tech
were two occurrences when the S&P 500 monthly returns wreck, the 9/11 terrorist attacks, the 2002 accounting scandals
were lower than -12% over the period, and the proforma at Adelphia, Enron and WorldCom and the 2008 credit collapse.
portfolio hedge program returned a monthly average of
+230.6%* during these months. As a consequence of this
CUMULATIVE RETURN
highly convex tail hedging strategy, the hedged portfolio
outperforms the unhedged portfolio by nearly 600 bps on 200
average during these months of market stress. It is the 180
160
blending of linear (short sellers) and convex hedges (out of 140
Ann. Return: 7.83%
Ann. Vol: 8.19%
the money options and short credit strategies) that help us 120

Percent
100
achieve this asymmetric return profile where the gains in the 80
extreme negative tail events far outweigh the drag on 60 Ann. Return: 7.10%
40 Ann. Vol: 9.39%
performance during periods of benign equity markets.
20
0

Apr-11
Oct-03

Apr-05
Oct-97

Apr-99

Apr-02

Apr-08
Jan-03

Oct-06
Jul-98

Oct-00

Oct-09
Jul-01
Jan-97

Jul-10
Jul-07
Jul-04
Jan-00

Jan-06

Jan-09
Institutional unhedged portfolio-Typical Institutional Portfolio*:
(55% Equities, 40% Fixed Income, 5% Hedge Funds)
Portfolio hedge
Enhanced new hedged portfolio-Typical Institutional Portfolio with 2.25% Portfolio
Hedge allocation (0.50% Short Equity, 1.25% Option Arbitrage, 0.50% Short Credit)
Institutional unhedged portfolio—Typical Institutional Portfolio*:
enhanced portfolio return (%)

(55% Equities, 40% Fixed Income, 5% Hedge Funds)

250 230.6 12
Portfolio hedge return (%)

200 Enhanced new hedged portfolio—Typical Institutional Portfolio with 2.25%

Institutional portfolio and

150 8 Portfolio Hedge allocation (0.50% Short Equity, 1.25% Option Arbitrage, 0.50% Short Credit)
100 4
50 14.2 14.4 Institutional unhedged portfolio—Typical Institutional Portfolio*:
3.9 2.2 0
0 (55% Equities, 40% Fixed Income, 5% Hedge Funds)
-50 (# occurences) -0.8 -5.3 -3.3 -8.5
-100 -4 Enhanced new hedged portfolio—Typical Institutional Portfolio with 2.25%
-150 (2) (3) (12) (16) (31) (51) (34) (19) (2) Portfolio Hedge allocation (0.50% Short Equity, 1.25% Option Arbitrage, 0.50% Short Credit)
-200
-8 DIFFERENCE 10 IN PERFORMANCE BETWEEN ENHANCED AND
-250 -12 INSTITUTIONAL8 PORTFOLIOS
Enhanced Portfolio
>9%

Difference in performance
< -12%

6
(%) portfolios (%)

(rolling 12-month returns)

3% to 6%
0% to 3%

6% to 9%
-3% to 0%
-6% to -3%
-9% to -6%
-12% to -9%

and Enhanced and

4 outperforms
2
10
0
8
-2 Enhanced Portfolio
Difference in performance

S&P 500 Index monthly return range 6

Institutional

-4
between

4 outperforms
Institutional portfolios

-6 Institutional Portfolio
between Enhanced

2
Source: J.P. Morgan Alternative Asset Management, Bloomberg. Financial -8 outperforms
0
information is as of April 2011. -10
-2
Jul-10
Apr-11
Jul-07
Oct-03
Jan-97

Apr-05

Oct-06

Oct-09
Apr-08
Jan-06

Jan-09
Jul-01
Jul-98
Oct-97

Jan-03
Apr-02

Jul-04
Apr-99

Oct-00
Jan-00

-4
-6 Institutional Portfolio
-8 outperforms
-10
Jul-10
Apr-11
Jul-07
Oct-03
Jan-97

Apr-05

Oct-06

Oct-09
Apr-08
Jan-06

Jan-09
Jul-01
Jul-98
Oct-97

Jan-03
Apr-02

Jul-04
Apr-99

Oct-00
Jan-00

Source: J.P. Morgan Alternative Asset Management, Bloomberg. Financial

information is as of April 2011.

* Typical Institutional Portfolio represents 40% Barclays Aggregate Bond Index, 20% S&P 500, 20% MSCI AC World Index Ex U.S. (LCL currency), 15% Russell 2000 and 5%
HFR Composite . HFR Composite reflects performance of HFRX Global Hedge Fund Index from April 2003 onwards and HFRI Fund Weighted Composite Index from January
1997 to March 2003. The MSCI AC World Index Ex U.S. (LCL currency) reflects performance of the MSCI AC World Index Ex U.S. (LCL currency) from February 1999 onwards
and the MSCI World Index (LCL currency) prior to February 1999. Data presented from January 1997 through April 2011. Portfolios are rebalanced quarterly. Enhanced
portfolio allocation to Portfolio Hedge is funded pro-rata from Institutional Portfolio allocations. Please see “Important Notes” in the back of this presentation for more
information. The above charts are for illustrative and discussion purposes only. Past performance is not indicative of future results. Returns are proforma and have not
been experienced by investors.

6 | Tail hedging solutions for uncertain times

Conclusion Finally, JPMAAM’s dynamic mix and flexibility to adjust
weightings to different hedging strategies makes this approach
An increasing number of providers have recently launched tail
extremely modular and can be tailored to individual portfolios,
hedge products. We believe JPMAAM’s approach of
depending on investors’ exposure to given factor risks, their
constructing a diversified hedge portfolio with different
concerns about specific risks or their desired level of protection.
payouts is unique and offers a number of advantages. As
For example, depending on an investor asset allocation,
demonstrated previously, the careful blending of linear and
sensitivity to risk factors and level of protection needed, we
convex hedges helps create an asymmetric return distribution
would tend to over- or under-weight any of the below
convex to tail events while limiting the drag on performance
strategies:
on the upside. Our focus on capital efficient hedging
techniques means that less capital is needed to achieve a 1. Shorter duration, deep OTM equity and equity index puts
given level of protection, allowing investors to seek higher
performing investments. 2. Dedicated equity short sellers

A well constructed portfolio hedge can help protect significant 3. Credit protection fund
capital in market dislocations. This protection has a number of
The bottom line is that we can help construct a tail hedging
benefits: 1. It may allow investors to hold assets that have
program that is geared towards specific risk factors (equity or
dislocated as opposed to selling these in an unfavorable
credit related for example) and work together with the client to
market to raise liquidity in their portfolios. 2. It may allow
define the most appropriate attachment points given their risk
investors to be offensive and reallocate their portfolios to
aversion/views of market risks.
undervalued assets during or after the dislocation. Most
investors who experienced severe losses in 2008 were not in a
position to take advantage of the dislocations in the market.

J.P. Morgan Asset Management | 7

Tail hedging solutions for uncertain times

CONTACTS

Pascal Bougiatiotis
London: +44-207-742-2274
Calvin Ho, CFA
Asia: +65-68821085
Raphael Guiragossian, CAIA
Geneva: +41-22-744-1926
Douglas Smith, CFA
New York: 212-648-2622

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The opinions and views offered constitute JPMAAM’s best judgment, are based on the current market environment and can be changed without notice. JPMAAM believes
the information provided is reliable but does not warrant its accuracy or completeness. The views and strategies described may not be suitable for all investors.
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following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited which is regulated by the Financial Services Authority; in other EU jurisdictions
by JPMorgan Asset Management (Europe) S.à r.l., Issued in Switzerland by J.P. Morgan (Suisse) SA, which is regulated by the Swiss Financial Market Supervisory Authority
FINMA; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, all of which are
regulated by the Securities and Futures Commission; in Singapore by JPMorgan Asset Management (Singapore) Limited which is regulated by the Monetary Authority of
Singapore; in Japan by JPMorgan Securities Japan Limited which is regulated by the Financial Services Agency, in Australia by JPMorgan Asset Management (Australia)
Limited which is regulated by the Australian Securities and Investments Commission and in the United States by J.P. Morgan Investment Management Inc. which is regu-
lated by the Securities and Exchange Commission. Accordingly this document should not be circulated or presented to persons other than to professional, institutional
or wholesale investors as defined in the relevant local regulations. The value of investments and the income from them may fall as well as rise and investors may not get
back the full amount invested.
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