Analyzing 220 years of global data, the authors find that defensive equity factors help reduce downside risk, but Defensive Absolute Return and trend-following strategies provide the most robust, complementary protection against drawdowns.
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Abstract
We examine downside protection—or defensive—strategies over more than 220 years of global financial history, covering many years in which traditional equity–bond portfolios suffer and across a wide range of economic scenarios and historical regimes. Traditional defensive equity factors—low-risk, quality, and value—consistently provide effective downside protection, whereas gold and put options prove less drawdown or cost-effective. Our long-run evidence shows that multi-asset defensive strategies, particularly a return-enhanced version of the defensive absolute return (DAR) portfolio introduced by Cavaglia et al. (2022) and trend-following, provide the most effective downside protection. DAR and trend-following are complementary across tests by diversifying each other across stages of drawdowns. Investors can improve the defensive properties and improve total portfolio outcomes of traditional portfolios by considering the deep sample evidence on defensive strategies provided in this paper.