Hedging in the Age of Creeping Risk: A CIO’s Masterclass

I’ll admit it: for a long time, I thought hedging was a solved problem.

In my head, it was a neat, mostly technical exercise. You identify the portfolio’s unwanted sensitivities—its delta, its skew, its tail risk—then you go to the market and buy offsetting exposure. A bit of calculus, some optimization, some execution. Done.

Important? Yes. Interesting? Not particularly. It felt like plumbing. Necessary, but hardly deserving of all the conference panels, white papers, and dramatic headlines.

That view didn’t survive a recent coffee with a friend of mine—a seasoned Chief Investment Officer who has spent the last two decades steering large institutional portfolios and surviving more investment committee meetings than he’d care to count.

Over a quiet table, he made a simple statement:

“Hedging is back en vogue. Not as a trade. As a discipline.”

He wasn’t excited about the VIX, or some clever options structure. What he was seeing instead was a slow, growing unease in the institutional world: a sense that certain parts of the market, stretched equity valuations, and especially the seemingly calm world of private debt, are carrying more latent fragility than their smooth performance lines suggest.

In that setting, my neat “hedging is an optimization problem” view started to feel… shallow.

Because, as he patiently walked me through, institutional hedging is not primarily about Greeks or payoff diagrams. It’s about answering a layered series of questions that are strategic, political, and operational, as much as they are quantitative.

What follows is, essentially, the masterclass he gave me.

1. The deceptively simple question: What exactly are you hedging?

Most hedging conversations start with a sentence like:

“We want to hedge against a downturn.”

It sounds reasonable. It’s also functionally useless.

My friend pushed me to sharpen that statement until it actually meant something.

“Are you worried about a sudden shock,” he asked, “or about a slow burn?”

He broke it down:

• Sudden, discontinuous losses
  The overnight gap. The surprise policy move. The weekend bankruptcy that turns into a Monday open -10%.
  That’s where you need explosive convexity—deep or out-of-the-money index puts, VIX convexity, variance structures. Things that respond immediately and disproportionately.
• Gradual, grinding drawdowns
  The market that drifts lower month after month. Not dramatic. Just consistently uncomfortable, eroding 15–20% over a year or so.
  Here, lottery-ticket options are often the wrong tool. You want dynamic delta—strategies that respond to persistent direction, like trend-following, managed futures, or rule-based overlays that systematically reduce risk as trends establish.

Then he added a second dimension:

“Do you care more about calendar-year losses, or about true peak-to-trough drawdowns?”

An institution judged and rewarded on calendar years may frame its hedge one way.
A long-term owner focused on compounding will frame it very differently.

Those distinctions might sound academic, but they aren’t. The choice between event risk vs. trend risk, and calendar vs. drawdown, effectively splits your hedging universe in two. Many failed hedging programs never had a chance—not because the instruments were “bad”, but because the risk path they were built to protect was never clearly defined.

2. The cost question: How do you want to pay for peace of mind?

Once we’d clarified what you’re hedging, the conversation turned to cost. And this was where my original “optimization” mindset really started to crack.

Every hedge has a cost. That part is obvious. What’s less obvious, and politically critical, is how that cost shows up.

He framed it simply:

• Explicit premium:
  You spend a visible amount of money on options. They decay slowly in quiet markets. They spike in stress. There’s no hiding the line item.
• Implicit return drag:
  You allocate part of the portfolio to a diversifying or defensive strategy with lower expected return. It may protect the portfolio when things go wrong, but over time you’re sacrificing some upside.

Economically, both are “cost.” But psychologically and politically, they are very different.

Some boards will never accept a recurring, explicit premium. Others cannot tolerate the idea of giving up any expected return for something that doesn’t have a clear benchmark.

His point was blunt:

“The best hedge isn’t just the one that works on paper. It’s the one whose cost structure your institution can live with for years, not quarters.”

Ignore this, and your hedging program won’t die because of market performance. It’ll die in a meeting.

3. The monetization paradox: If the hedge works, what then?

Then came the question I had almost never asked myself:

“Suppose your hedge works. What’s the plan?”

You buy tail risk protection. Markets fall. Volatility explodes. Suddenly the hedge is worth real money.

• Do you monetize as soon as it hits a certain value and use the proceeds to rebalance?
• Do you hold it until expiry, letting it potentially give back value as markets stabilize?
• Or is the hedge designed as a permanent diversifier, something you never touch, just hold through cycles?

Each answer leads you to a different implementation—tenors, strikes, size, funding.

And then he shared a real example:

“Some teams had hedges that did exactly what they were supposed to do in a crisis. But they couldn’t monetize in time because the people with sign-off weren’t available that day.”

The image stuck with me. You have this carefully designed fire extinguisher, and in the moment you need it, the glass box is locked.

A hedging program without a clear, pre-agreed monetization protocol—including who can act and under what conditions—isn’t really a hedging program. It’s a theory.

4. Implementation: where elegant theory meets messy reality

By this point, we’d gone through three layers—all before picking a single instrument.

Only then did he move to implementation.

This is where the devil shows up in the details:

• Capital efficiency
  It’s not enough that a hedge “wins” in a crisis. You have to ask: How much capital did it tie up on the way?
  A structure that delivers +5% in a drawdown but quietly consumes 15% of your capital through margin and carry is not a good trade.
• Liquidity and trading windows
  Markets don’t move in committee schedules.
  Who can actually trade? What hours? Through which brokers and lines?
• Operational readiness
  Are the playbooks, limits, and systems set up so that, in a real shock, decisions can be executed within hours—not after three rounds of emails and an emergency meeting?

From there, the discussion naturally shifted to packaged solutions, especially Bank QIS (Quantitative Investment Strategies).

Rather than hiring a hedge fund to run, say, a dynamic put overlay or a trend-following sleeve, a QIS index can give you:

• rules-based, transparent strategy logic
• daily liquidity, often with 24-hour execution
• large, comparable universes for benchmarking
• scalable notional capacity

For institutions who value predictability and clean governance, QIS is a way to industrialize hedging: pre-defined rules, clear documentation, and repeatable behavior across cycles.

You still need to understand exactly what’s under the hood. But once you do, the implementation risk can be significantly lower than relying on a rare, highly idiosyncratic “tail risk fund” that may or may not behave as expected when stress hits.

5. The private debt problem: smooth lines, hidden risk

We then turned to what is arguably the most interesting (and uncomfortable) area right now: private credit.

On the surface, it’s a dream:

• steady coupons
• low reported volatility
• attractive spreads
• institutional consensus that “this is where the money is going”

But those smooth return paths are exactly why hedging matters.

Public credit trades every day; it reprices risk in real time. Private debt doesn’t. Marks adjust slowly. When the environment turns, the repricing is delayed and lumpy.

So what are you really hedging?

• Spread and default risk that shows up first in public markets
• Liquidity risk when secondaries thin out and bids vanish
• Valuation lag, where your reported NAV still looks stable while credit risk has already moved

You can’t hedge each private loan individually. Instead, you accept basis risk and use liquid proxies:

• CDX HY/IG indices to hedge systemic credit stress
• Options on HYG/LQD to add convexity to those hedges
• Equity and volatility hedges for the broader liquidity and sentiment shocks that hit credit along with equities
• Systematic trend strategies that tend to benefit when macro risk is repriced across assets

His core message: you don’t hedge private debt by pretending you can engineer perfect one-to-one offsets. You hedge it by admitting what it really is—a form of credit beta with lag and opacity—and using liquid tools to protect the total portfolio against that macro credit cycle.

Done well, that doesn’t mean you run away from private debt. It means you can keep your allocation with more confidence, because the portfolio around it is better protected.

6. The strategic endgame: what will you do with newfound risk capacity?

By now, I was completely out of the “hedging is a footnote” mindset.

And then he added one more layer.

“Imagine your hedge works exactly as designed. Your tail risk is lower. Your drawdowns are shallower. Your volatility is more controlled. What happens next?”

A good hedge doesn’t just remove pain. It creates opportunity.

If your downside is better contained:

• are you willing to lean into dislocations when others are forced sellers?
• can you maintain your private credit allocation through a credit cycle instead of de-risking at the wrong moment?
• do you have the conviction to hold higher long-term-return assets, knowing the tail has been partially clipped?

In other words: a hedge doesn’t just protect your current portfolio, it reshapes what portfolio you can comfortably hold.

That’s the strategic endgame. Hedging as an enabler, not just a shield.

7. Hedging is not a one-off decision. It’s an ongoing discipline.

We finished our coffees, and I realized something quite simple:

I hadn’t been wrong that hedging involved calculus and optimization. I had just confused the implementation layer with the whole story.

For an institutional investor, hedging is:

• defining which risk paths truly matter
• choosing how the institution is willing to pay for protection
• agreeing in advance what happens when the hedge works
• ensuring the infrastructure exists to execute, monitor, and adapt
• revisiting all of the above as markets evolve

It’s quantitative, yes. But it’s equally about governance, psychology, and process.

I walked into that coffee thinking hedging was a minor technical detail.
I left seeing it as one of the clearest tests of serious risk stewardship.

In a world of creeping risk—particularly in those calm-looking corners like private credit—the “fuss” about hedging is not overdone. It’s overdue.

And if there’s a single lesson to take away from that CIO’s masterclass, it might be this:

A good hedging program doesn’t just reduce volatility.
It buys you the freedom to stay invested when it matters most.

If you are rethinking your hedging approach, whether because of changing risks, new exposures or governance questions, Resonanz Capital can help. We support investors from defining objectives and risk paths to selecting the right tools and executing them with clarity and discipline. If you would like to explore how a well-designed hedging program can strengthen your portfolio, feel free to reach out.