Karim Rahemtulla, Head Fundamental Tactician, Monument Traders Alliance Dear Reader, Dow up 700 points. Nasdaq jumping 4%. Nvidia "reigniting the AI trade" this morning. You know what I'm hearing? "The bear thesis is falling apart." Listen, I've been doing this for a long time. And if there's one thing I've learned, it's that when everyone's celebrating and saying the bear thesis is dead, that's exactly when you need to be thinking about protection. Here's What's Happening Right Now Nvidia beat earnings. Jensen Huang says Blackwell chip demand is "off the charts." He's rejecting the idea of an AI bubble. The market loves it. AI stocks are flying. Everyone's piling back in. But you know what? This is the perfect example of why we need to talk about hedging against the AI trade unwinding. The AI trade is so big that if it unravels for any reason, you could see a correction that would likely meet the definition of a black swan event - something no one is expecting. What Is a Tail Risk Hedge? A tail risk hedge is an investment strategy designed to protect your portfolio against extreme market events - the "tails" of the probability distribution, like a 2008-style crash. It usually costs money during normal markets, like an insurance premium, but can pay off significantly during crises. First, You Need to Define Your Tail Risk Tail risk equals rare but extreme downside events. We're talking about a 20-50% equity market drop. You've got to decide what you're hedging against: - Equity crash - S&P 500 drawdown
- Credit market stress - corporate bond spreads widening
- Volatility spike - VIX surge
- Interest rate shocks - sudden yield jumps
Second, Pick Your Tail Risk Hedge Investment A. Long Volatility Strategies (Most Direct) Buy deep out-of-the-money put options on equity indexes like the S&P 500 and the Nasdaq. Strike prices 20-40% below current levels, several months to years out. They're cheap to carry, big payoff in a crash. VIX calls or futures - VIX tends to explode during market panics. B. Defensive Asset Allocation Long Treasuries - especially long-duration like 20-30 year bonds. They historically rally in crises. Gold - often acts as a safe haven, though not always. Cash - dry powder and protection against forced selling. C. Tail-Hedge Funds / ETFs Some funds specialize in systematic hedging. Cambria Tail Risk ETF (TAIL) is one of them worth investigating. Third, How to Implement the Hedge 1. Estimate Portfolio Exposure If you're 80% equities, a 30% crash means a 24% portfolio drawdown. Decide how much of that you want to insure against. 2. Allocate a Small % to Hedge Typically, 1-5% of the portfolio is in tail risk hedges. Example: $1M portfolio means you spend $20k-$50k per year on hedges. And here's the beautiful thing about today's market action - with everyone euphoric and volatility crushed, these hedges are probably trading at their cheapest levels in months. 3. Choose Your Hedge Mix Here's an example "Crash Hedge": - 70% in equities
- 5% in long-dated S&P 500 deep OTM puts
- 10% in long Treasuries
- 5% in gold
- 10% in cash
4. Rebalance & Roll Hedges Options expire, so you need to roll them. Buy new ones as old ones near expiration. Monitor cost versus effectiveness. | 
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