Hedge Your Portfolio Before a Recession: Pro Playbook

What the pros do before the storm, not after

Look, the people who survive recessions with their sanity (and their capital) aren’t the ones making heroic trades on day three of a panic. They’re the ones who did the boring work before the weather turned. If you came here searching “how-to-hedge-portfolio-before-recession,” you’re in the right place. The goal here is simple: set guardrails now, risk limits, liquidity, and hedges, so you’re not scrambling when futures are locked limit-down at 4:00 a.m.

Here’s the thing: markets don’t give you time to think when it matters. In March 2020, the S&P 500 fell about 34% from Feb 19 to Mar 23 (S&P Dow Jones Indices). U.S. circuit breakers tripped multiple times that month, and the VIX closed above 80 on March 16, 2020 (CBOE). In 2022, stocks dropped roughly 19% and core bonds fell ~13% (Bloomberg U.S. Aggregate), which reminded everyone that the “safe” side of the portfolio can hurt too. That’s why pros set the plan while it’s quiet.

What you’ll get from this section is the playbook the better portfolio managers use before the storm shows up on radar:

• Define your max pain up front. Write down your maximum drawdown and acceptable volatility before stress hits. If your number is -12% for the overall portfolio and a 90-day annualized volatility under, say, 12%, that becomes a non-negotiable boundary. (Jargon moment: “drawdown” just means the peak-to-trough drop, the worst drop from a high.)
• Decide your hedge budget, then stick to it. Many pros earmark 1-2% of portfolio value per year for hedging, period. You won’t love the spend when markets grind higher, but when spreads blow out and liquidity thins, that budget is what keeps you from selling the good stuff at the worst time. Honestly, I wasn’t sure about this either early in my career; paying for protection that “loses” money feels wrong… until it doesn’t.
• Pre-position liquidity. Keep dry powder in short T-bills or a cash-like sleeve now, not after you get a margin call. In 2020, bid-ask spreads widened across credit, and dealers pulled back balance sheet, having ready cash meant you could buy the discounts instead of watching them from the sidelines.
• Pre-wire your hedges. Choose the instruments in advance, index puts, put spreads, collars, long volatility funds, tail hedges, or simple duration via Treasurys, and set triggers for when to turn them on. Decide in writing which hedges pair with which risks (equity beta, credit spread, rate shock) so you’re not improvising.
• Write down rules now. Triggers, sizing, and exits. Example: “Add 50 bps notional of 3-month S&P 5% OTM puts if VIX < 18 and ISM New Orders rolls below 50; remove half after a 10% drawdown or if VIX > 35.” Is that perfect? No. But a decent rule beats a great guess at 2 a.m.
• Treat hedges like insurance. Judge them by risk reduction, smaller drawdowns, shallower VAR, quicker recovery time, not by whether they “make money” every month. Insurance that pays off every month isn’t insurance; it’s probably just beta in disguise.

Anyway, the market backdrop this year is still rates-elevated versus the 2010s and liquidity that looks fine until it doesn’t (that’s kind of how it goes). There’s complexity here, correlations can flip, hedges can basis-mismatch, but you can simplify with a checklist you actually follow. Actually, let me rephrase that: you should simplify it enough that you’ll follow it when your hands are shaking.

Bottom line: Set the boundaries, fund the insurance, and stage the cash before the skies darken. When the tape gaps down, your plan should already be running… but that’s just my take on it.

Reading the dashboard in 2025 without guessing the future

So, here’s the thing: you don’t need to call the exact month a recession starts. You need a dashboard that nudges you from “do nothing” to “tighten risk” to “deploy hedges,” without heroics. I like simple thresholds that have real history behind them, not vibes. And yes, it’s a little messy, markets are messy, but the checklist below is what I actually keep on a sticky note, you know, next to the coffee stains.

• Credit spreads (watch high-yield OAS, not headlines). When the ICE BofA US High Yield OAS pushes meaningfully wider, the tape is telling you something. As context: spreads blew out to ~1,000 bps in March 2020 (Fed data), touched ~540 bps in Q4 2018 during the growth scare, and surged past 800 bps in late 2008. A practical trigger: start paying attention when HY OAS breaks above ~450-500 bps and accelerates week over week. That level has preceded or coincided with stress in past cycles. If it’s grinding tighter, relax; if it’s stair-stepping wider, don’t argue with it.
• Earnings revisions and margins. Falling forward EPS estimates are a quiet early cue. In 2022, S&P 500 12‑month forward EPS estimates were cut by about 7-8% from June to December (FactSet, 2022), and net margins slipped from ~12.9% in 2021 to ~11.3% in 2022 (FactSet). You don’t need perfect precision, if revisions breadth turns negative for weeks and margin guidance tilts down across sectors, that’s risk-on for hedges (risk-on the hedges, I mean). A rule I use: if revisions are negative for, say, 4-6 straight weeks and the downgrade/upgrade ratio is >1.5:1, that’s a yellow-to-orange light.
• Yield curve shape still matters. Yes, stocks rallied while the curve inverted, but the signal wasn’t “wrong”, just early. The 2s/10s hit around -100 bps in July 2023, and the 3m/10y saw roughly -150 to -180 bps at points in 2023 (Treasury data). Deep, persistent inversion has historically lined up with later growth slowdowns. My take: when the 3m/10y is below -75 bps for 3 months, you stop adding cyclicals and start planning hedges; if it re-steepens because the front end falls into cuts while growth data softens, that’s not exactly bullish either.
• Unemployment trend, not a single print. One bad jobs number can be noise. A rising trend over several months is different. The Sahm Rule (Claudia Sahm’s work) triggers when the 3‑month average unemployment rate rises 0.50 percentage points above its 12‑month low, historically that’s lined up closely with recessions (used in 1970, 1974, 1980, 1981-82, 1990, 2001, 2008, 2020 episodes). I’ll start phasing hedges if the 3‑month average is up ~0.3-0.4 pp and broad layoff announcements are ticking up, no need to wait for the full 0.5 pp to get some insurance on.

Rules-based trigger mix (phase hedges, don’t flip a switch)

• Stage 1 (25% hedge): HY OAS > 450 bps and 4+ weeks of negative EPS revisions breadth.
• Stage 2 (50% hedge): Add if 3m/10y < -75 bps for 3 months or unemployment 3‑month avg up ≥0.3 pp from its 12‑month low.
• Stage 3 (75-100% hedge): HY OAS > 550-600 bps and unemployment up ≥0.5 pp (Sahm trigger) or revisions down >10% from peak over the last 6 months.

Speaking of which, none of this requires guessing the NBER start date. It just asks you to respond to trends that real money has cared about for decades. Anyway, I get that correlations can flip and spreads can whipsaw, been there at 2 a.m., caffeine in one hand, regret in the other. The point is consistency. A decent rule beats a great guess, and a staged hedge beats a late scramble.

Actually, let me rephrase that: the dashboard won’t make you a hero, it just keeps you from doing something dumb when volatility spikes. That’s enough. And if the signals back off, spreads tighten, revisions stabilize, unemployment trend cools, you peel the hedges back. Simple. Not easy, but simple… which is exactly what you want when your hands are shaking.

Your recession-ready core: cash, Treasuries, and quality credit

Your recession‑ready core: cash, Treasuries, and quality credit

Here’s the thing: when growth cools and liquidity tightens, the stuff that saves you isn’t clever, it’s sturdy. As I mentioned earlier, the mistake in 2022 wasn’t owning bonds, it was loading up on duration all at once. That year the Bloomberg U.S. Aggregate Bond Index fell about 13.0%, and the Bloomberg U.S. Long Treasury Index dropped roughly 29%, both 2022 calendar-year numbers. If that didn’t convince folks that “long term” can feel very long in a rate shock, I don’t know what will.

• Keep a real cash bucket (6-12 months if you’re retired). This isn’t dead money; it’s insurance against sequence risk. If you can fund 6-12 months of withdrawals from cash, you’re not forced to sell equities or bonds on bad days. I’ve watched clients sleep better just knowing the next year of spending is already set aside. And yes, cash actually earns something again, which helps the psychology.
• Ladder short‑to‑intermediate Treasuries. Stagger maturities in, say, 3, 6, 12, 18, and 24 months (extend to 3-5 years if you want a bit more term but still keep it sane). The point is to spread reinvestment risk so you’re not rolling everything the same week the Fed surprises. After 2022, taking duration in chunks beats taking it in a gulp.
• Favor high‑quality, shorter‑duration corporates. Upgrade credit quality before spreads move, not after. History’s pretty blunt here: the ICE BofA US High Yield OAS blew out from roughly 360 bps in mid‑Feb 2020 to about 1,087 bps by March 23, 2020. That’s a 700+ bp gap in a few weeks. Late in the cycle, lower‑quality paper can gap fast, so keep the credit bar high and the duration short.
• Keep some TIPS if inflation still nags you. Inflation shocks happen, June 2022 CPI hit 9.1% year over year. You don’t need to overhaul everything into TIPS, but a sleeve can help if we get another surprise. Think of it as a hedge against your hedge being wrong.
• Don’t reach for yield in junky credit late in the cycle. Look, I get it, that extra 150 bps looks tempting on a screen. But spreads rarely “drift” wider, they jump. And liquidity vanishes right when you most want to exit. If you want income, earn it with structure (ladders, barbell) and quality, not wishful thinking.

Anyway, the target here is a base that can bend without breaking. Cash to cover near‑term needs, a Treasury ladder to average into whatever rate path we actually get, and high‑quality corporates for incremental yield without playing hero ball. If you’re wondering how this connects back to the hedging dashboard, it’s simple: the dashboard tells you when to add defense; this core makes sure you don’t have to sell your best assets to pay the bills while you wait. I once had a client who called their cash bucket “permission to be patient.” Cheesy name, great idea.

Reminder: recessions aren’t the only time spreads widen, but recessions make it stickier. Long‑run high‑yield spreads have averaged around 500 bps (late‑1990s to 2024 data), but the path there isn’t smooth. Position for the gaps, not the average.

Actually, let me rephrase that, build the boring core first. If the cycle softens later this year, you’ll be glad you did. And if it doesn’t, you won’t have to apologize to your future self for taking 2022‑style duration risk all at once.

Equity defense that actually holds up

Look, I get it: when the economy slows, the instinct is to yank equity risk and hide. But the thing is, equities are still your growth engine over a full cycle. The trick is tilting within the asset class, toward businesses that defend margins and cash flows, so you don’t have to bail entirely. Speaking of which, here’s the thing that actually works when growth wobbles: quality first, not just “cheap.”

Favor quality and profitability over pure low P/E. Cheap can stay cheap, sometimes for a very good reason. I’ve seen plenty of low P/E names with structurally low returns on capital, thin pricing power, and debt they can’t comfortably refinance when spreads back up. We just reminded ourselves that long‑run high‑yield spreads have averaged around 500 bps (late‑1990s to 2024 data). That’s the average; the spikes hurt. Companies with high return on invested capital, stable gross margins, and clean balance sheets tend to hold price and funding better when demand slows. Anyway, if you want the factor shorthand: quality/profitability > deep value-for-value’s-sake.

Lean into classic defensives and dividend growth. Staples, healthcare, and utilities are boring… which is great when GDP downshifts and pricing power migrates to necessities. Dividend growth is the tell, management teams that raise payouts consistently are usually running cash‑generative, resilient models. S&P history is blunt on the pain of drawdowns: 2008’s S&P 500 peak‑to‑trough was roughly −57%, and in 2020 we saw about −34% in a matter of weeks. Companies that could keep paying and hiking dividends didn’t avoid the hit entirely, but they cushioned it and recovered with less drama. This actually reminds me of a client who measured “sleep at night” by the number of holdings that raised dividends during recessions. Quirky, but not wrong.

Use low‑volatility wrappers to stay invested. If you want to dampen swings without market‑timing every headline, low‑vol or minimum‑vol ETFs do the job. The math is simple: lower beta, fatter weight in steadier sectors, typically smoother ride. You stay in the game, but the daily P&L doesn’t punch you in the gut. It’s not magic; it’s just owning businesses with less earnings variance and less use. If this sounds a bit complicated, it is and it isn’t, you’re basically paying a tiny fee to systematize common sense.

Trim high‑beta cyclicals and high operating use. Recessions punish fixed‑cost structures. If unit volumes slip and you can’t flex costs, margins compress fast, then covenants whisper. I’m talking early‑cycle industrials at peak utilization, discretionary retailers with bloated leases, ad‑dependent models that are “fine until they aren’t.” Keep your best compounders, but size down the stuff that needs perfect conditions. So, reduce the names where variable demand meets fixed expense lines, that asymmetry turns small slowdowns into big earnings hits.

Position size like you remember 2008 and 2020

Reminder: the S&P 500 dropped roughly 57% peak‑to‑trough in 2007-2009 and about 34% in weeks during Feb-Mar 2020. Position size matters more than your conviction memo.

Actually, let me rephrase that, don’t let any single idea be large enough to sink the boat. If quality tilts and low‑vol sleeves keep you invested, sizing keeps you solvent. And in 2025, with earnings revisions a bit choppy and leadership narrow earlier this year, balance beats bravado.

• Overweight: dividend growers, staples, healthcare, utilities; quality/profitability factors.
• Core tools: low‑vol or min‑vol ETFs to smooth the ride while staying invested.
• Underweight: cyclical, high‑operating‑use names and capital‑intensive models with thin pricing power.
• Risk control: hard caps on single‑name and sector weights, because, you know, math.

Anyway, the aim isn’t to predict the exact month a recession shows up, maybe later this year, maybe not. The aim is to own businesses that defend margins and cash flows if growth fades, and still compound if it doesn’t. Boring? Sure. Effective? Also sure.

The hedge toolkit: puts, collars, and when to use VIX

Look, hedging is insurance, not a profit center. The goal is to cushion a hit, stay invested, and sleep better. And, as I mentioned earlier, the cheapest hedge is sizing, but let’s talk about the stuff you can actually execute in a vanilla brokerage account.

Index puts cap the downside. Simple and clean: buy S&P 500 (SPX) or ETF (SPY/IVV) puts to define your worst-case over a window. A 3-6 month put, 5-10% out-of-the-money, is a reasonable “seatbelt.” You won’t love the carry cost, but when markets gap, it’s there. For context, Cboe data show the VIX has averaged around 19 since 1990, but it can go from 12 to 30 in a blink, which makes those same puts 2-3x more expensive overnight. And during shocks, you know how it goes: the S&P 500 fell about 34% in 23 trading days in Feb-Mar 2020, and about 25% peak-to-trough in 2022 (price only). Puts paid.

Collars reduce cost by selling calls you can live with. If paying premium every quarter makes you twitchy, buy a put and sell a call above your target value. That call sale helps fund the put. The trade-off: you cap upside if the market rips. Actually, wait, let me clarify that, you’re choosing to give up gains above a level you’re happy owning. For most long term investors, that’s fine. The key is picking a call strike you won’t regret in two weeks. A slightly out-of-the-money call (say 3-7%) often offsets a decent chunk of the put cost when the VIX sits in the teens.

Structure matters. Stagger and schedule.

• Stagger maturities across 3-6 months so you’re not hostage to one expiry. Rolling ladders dull timing errors.
• Stagger strikes too, some closer for fast shocks, some farther for cheap tail cover.
• Roll on a schedule (quarterly or monthly), not on emotions. If vol pops and your puts are deep in-the-money, roll down and out by rule.

VIX calls as crash insurance. When calm, they’re cheap; when panic hits, they’re eye-watering. Cboe history is clear: the VIX spiked above 80 during Oct 2008 and again in March 2020. Buying small VIX call positions when VIX sits near the low-to-mid teens can be efficient tail cover. But don’t chase them into a spike, implied vol-of-vol goes bonkers and you’ll overpay for protection you should’ve bought earlier this year.

Size to the drawdown you can stand. Hedging should cushion your target max drawdown, not try to “make money” on every dip. A rough, practical approach:

1. Define pain: say you want to cap a 20% portfolio drawdown at 12%.
2. Estimate beta: if your book is near market beta, a SPY put notional of 20-30% of portfolio value can materially soften a 1-2 standard deviation selloff. Higher beta? Nudge notional up.
3. Layer in a collar on a core sleeve to reduce carry if you hate premium burn.

Exit rules keep you honest.

• Take profits on hedges into spikes, scale out when VIX jumps 5-10 points or your put doubles. Crash insurance is for selling in a crash. Redeploy only if your signals (macro, breadth, credit spreads) still warn.
• Pre-set roll dates and strikes so a hot CPI print or a scary headline doesn’t push you into chasing.
• Don’t over-hedge after a drawdown. You’ll just lock in losses and cap the rebound.

Common mistakes to avoid (I’ve made a few over the years):

• Buying weeklies as your main hedge, theta decay will eat you alive.
• Selling calls too tight on high-growth names you secretly think can pop 15% on earnings. Be honest with yourself.
• Waiting to “feel scared” before hedging. By the time you feel it, prices already moved.

And yes, this is a bit complex. Options have Greeks, VIX has its quirks, and timing is messy. But a simple ladder of index puts or a low-cost collar can materially change your sleep quality. This actually reminds me of 2011, vol jumped, folks who had boring, scheduled hedges felt fine; the rest of us were refreshing screens. Anyway, keep it mechanical, keep it sized, and keep it boring.

Real diversifiers: gold, managed futures, and what’s changed since 2022

So, when I say “diversifier,” I mean stuff that actually behaved in real selloffs, not just backtests that look great until the market hits a wall. The thing is, you also have to accept the liquidity trade-offs. That’s what bit a lot of folks last cycle.

Gold has done its job often enough to deserve a seat, just not a crown. In the 2022 mess, spot gold finished roughly flat in USD terms (about -0.3% for the year) while the S&P 500 fell -18.1% and the Bloomberg U.S. Aggregate Bond Index dropped -13.0%. In 2008, gold ended the year up mid-single digits while equities cratered, imperfect hedge, but it preserved purchasing power. Earlier this year, gold has been firm with real yields wobbling and geopolitics simmering, but treat it as a diversifier, not a forecast machine. Size it modestly, know it can be volatile around Fed moves… and don’t expect it to bail you out every single week.

Managed futures/CTAs are one of the few strategies that actually paid you in 2022’s cross-asset drawdown. The SG Trend Index returned about +27.3% in 2022 as managers rode trends in rates, the dollar, and commodities. That’s the playbook: when markets pick a direction, especially in selloffs, trend systems can catch the move. Two practical notes: fees and liquidity. I’ve seen funds with expense ratios north of 2% plus performance fees; that’s a big hurdle in choppy, rangebound periods. Also check whether you truly get daily liquidity. Many ’40 Act managed-futures funds offer it, but some hybrids and SMA structures have looser terms. Nothing like thinking you’ve got cash-on-demand only to find a weekly or monthly dealing calendar.

REITs are not bond proxies anymore (if they ever were). They’re rate-sensitive and very sector-specific. In 2022, the FTSE Nareit All Equity REITs Index fell -24.9%, worse than the S&P, because higher yields hammered cap rates and financing costs. If you own them as a diversifier, focus on balance sheet strength (fixed vs. floating, laddered maturities), lease duration, and sector supply pipelines. Data centers and industrial with long leases behaved differently than office, obviously. Yield is tempting, but a 7% payout with a weak balance sheet is a siren song. I learned that the hard way in 2015 with a levered retail REIT, looked cheap, stayed cheap.

Private credit looked steady while everything else buckled, but remember the mechanics. Floating-rate senior loans benefited from higher base rates, and broad measures like the Cliffwater Direct Lending Index posted double-digit returns in 2022. Great, until you need liquidity. Many private credit vehicles have quarterly tenders (often ~5% of NAV per quarter) and can gate if requests exceed limits. Valuation marks also lag public markets by a month or two, which smooths the ride on the way down… until it doesn’t. Anyway, match the sleeve to capital you won’t need. If you might need it fast, don’t pretend a quarterly gate is “close enough.”

Remember 2022: bonds had a rough year. Duration risk is real when inflation pops and the curve reprices. The Bloomberg U.S. Aggregate at -13.0% wasn’t some exotic product, that was the core bond index. It’s why I still like mixing duration with assets that can benefit from higher rates or trends, rather than betting all on one macro outcome. Actually, let me rephrase that: diversify the diversifiers.

Look, I’m not saying load up on shiny rocks and black-box futures. A simple mix, some gold, a low-cost CTA vehicle, selective REIT exposure with strong balance sheets, and a measured private credit sleeve with honest liquidity terms, can smooth the path. It won’t be perfect… but that’s just my take on it.

Your 90-day playbook, and what happens if you wait

So, here’s the thing: ideas don’t hedge anything until they’re on paper, costed out, and scheduled. If you’ve been googling “how-to-hedge-portfolio-before-recession,” fine, now convert it into a checklist you can actually follow for the next 90 days. I’ll keep it tight but actionable.

1. Week 1-2: Put guardrails in writing
   • Document drawdown limits: Define max loss per sleeve. Example: “Equities: -15% from cost triggers a review; -20% triggers hedge add.” It sounds rigid, but indecision is costlier.
   • Set a hedge budget: Allocate, say, 1-2% of portfolio value per year for options premia. For context, in 2022 the S&P 500 fell about 25% peak-to-trough, while the Bloomberg U.S. Aggregate dropped -13.0% for the year (index data). Paying 1-2% to cushion some of that isn’t crazy.
   • Create a trigger checklist: Examples: VIX > 25, HY spreads > 500 bps, price < 200-day moving average, unemployment 3-month average ticking up. And yes, I know that’s a lot of “signals.” Pick three you’ll actually follow.
2. Week 3-4: Fortify the core
   • Build your Treasury ladder: 3-, 6-, 12-, 24-month rungs to cover known cash needs. You’re buying time and optionality.
   • Upgrade credit: Tilt from BBB/BB to A/AA where possible; avoid thin covenants. In 2020, high-yield spreads blew out above 1,000 bps briefly, credit reprices fast when growth wobbles.
   • Tilt equities to quality/defensives: More durable earnings, cleaner balance sheets. Historically, in recessions, low-vol and quality factors have had smaller drawdowns versus broad benchmarks. It’s not magic, just cash flow.
3. Month 2: Layer hedges and rules
   • Initiate collars or puts: Start with 1-3 month tenors on a portion of equity exposure. If I say “delta 25% puts,” that’s jargon, sorry. It just means options that kick in on decent selloffs without being insanely expensive.
   • Set roll dates on the calendar: Literally schedule them. No more “I’ll get to it.”
   • Define profit-taking rules: Example: If hedge doubles in value or spot falls 10%, take profits on half and trail the rest. Write it down so you don’t freeze.
4. Month 3: Add diversifiers and rebalance bands
   • Target allocations: Add a measured slug of gold (I like 3-7%) and a low-cost managed futures fund (2-6%). In 2022, several trend-following indices posted double-digit gains while both stocks and bonds fell, useful when correlations spike.
   • Set rebalancing bands: +/- 20% of target weights (relative, not absolute). When an asset drifts outside its band, you trim/add. It’s boring discipline that works.

Quick reminder: after a 20% drop, you need a 25% gain to get back to even. Math doesn’t care about feelings.

Look, I get it. Hedging can feel like paying for insurance you might not use. But the alternative is worse. If you don’t act, here’s what tends to happen when the cycle turns:

• Forced selling after big drops: Margin calls or sleepless nights push you to sell low. In March 2020, the S&P 500 fell ~34% in a month. Plenty of smart folks capitulated near the lows and missed a chunk of the rebound.
• Higher taxes from panic moves: Short-term gains are taxed at ordinary rates (up to 37% federally in the U.S., plus the 3.8% NIIT where it applies). Churning to “feel safe” can hand more to the IRS than necessary.
• Retiree damage from sequence risk: Withdrawing 4% while your portfolio is down 20-30% can lock in losses. Historically, poor early-year returns in retirement drive much lower terminal wealth even if long term averages look fine. Recovering from that is, honestly, really hard.

And here’s where my tone picks up a bit, because this stuff actually works when you do it. A simple 1-2% annual hedge budget, a Treasury ladder that funds a year or two of withdrawals, and pre-set rules for rebalancing… it lowers the chance you’ll make the one big mistake. I’ve watched too many people, including a couple of very clever CIOs, freeze at the worst moment. Don’t wait to “feel certain.” Certainty is expensive and usually late.

Anyway, if you execute this 90-day plan, you won’t be bulletproof, nothing is, but you’ll be prepared to absorb hits without blowing up your plan. And if you choose to wait, you might still be fine… until you’re not. That’s harsh, I know. But that’s just my take on it.

Frequently Asked Questions

Q: How do I set a hedge budget and what do I actually buy?

A: Look, keep it boring and mechanical. Earmark 1-2% of portfolio value per year for hedging, full stop. That’s the line from the article and it’s the right muscle memory. With that budget, prioritize: (1) Index put spreads: buy a 3-6 month S&amp;P 500 put ~5-10% out-of-the-money and sell a further 10-15% lower strike to cut cost. (2) Collars on big single-stock positions: sell covered calls 2-4% out and buy puts 8-12% out, usually 3-6 months. (3) VIX calls as “crash insurance”: tiny sizing (like 10-20 bps of capital) in 1-3 month VIX calls 30-50 strikes can pay off when vol rips. (4) Keep dry powder in 1-6 month T-bills so you don’t have to sell good assets at bad prices. Set calendar reminders to roll hedges monthly or quarterly so you don’t, you know, forget.

Q: What’s the difference between holding cash in T-bills vs a bond fund for pre-positioned liquidity?

A: T-bills are near-zero duration, so price moves are tiny, perfect for liquidity you might need on a bad tape. Broad bond funds carry duration; when yields jump, prices drop. The article called out 2022 when core bonds fell about 13% (Bloomberg U.S. Aggregate), which is exactly the “safe side can hurt too” lesson. Practical setup: park liquidity in 3-6 month T-bills or a short T-bill ETF, and keep your bond-fund exposure sized for income/total return, not emergency cash. If you must use a fund, keep effective duration under 0.5-1.0 years. And btw, reinvest maturing bills to ladder your cash so you always have something rolling off.

Q: Is it better to sell risk assets now or hedge and stick to my allocation?

A: So, start with the rules you wrote down before stress, max drawdown and target volatility. If your allocation is oversized vs those limits, trim back to target first. Then use the 1-2% annual hedge budget to protect the remaining risk: add index put spreads, collars on concentrated names, and a little VIX optionality. If you’re already within risk limits, don’t panic-sell, maintain the allocation, layer hedges, and keep 3-6 months of spending needs in T-bills so you’re not a forced seller. I’ve seen too many folks sell the bottom, then miss the first 10% rebound. Actually, let me rephrase that: sell to your plan, not to your fear.

Q: Should I worry about the cost of hedges if markets keep grinding up?

A: Short answer: yes, hedges are a line-item expense, but you budget for them just like homeowners insurance. Keep it efficient: use put spreads instead of straight puts to cut premium burn, finance puts with covered calls on positions you’re willing to let get called, and time rolls around earnings/Fed events when implied vol is rich if you’re a net seller. Size hedges to cover your max pain window, often 3-6 months, and refresh rather than over-hedge a full year out. A quick rule I use: if your hedge carry exceeds 25-35% of the drawdown you’re protecting over the tenor, it’s too expensive, tighten strikes, shorten tenor, or hedge a smaller slice. And yes, you’ll occassionally watch those premiums expire worthless; that’s the point, you paid to not need to panic.

@article{hedge-your-portfolio-before-a-recession-pro-playbook,
    title   = {Hedge Your Portfolio Before a Recession: Pro Playbook},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/hedge-portfolio-before-recession/}
}