The Best Defensive Strategies: Two Centuries of Evidence

Traditionally, balanced portfolios rely on the equity and bond risk premia to generate returns. The canonical 60% equity/40% bond allocation has produced strong long-run results, but its short- and medium-horizon experience includes large drawdowns. Those drawdowns matter not only behaviorally but mechanically, through volatility drag: large losses require disproportionately large gains to recover. This paper asks a practical question with an unusually strong empirical setup: which defensive strategies have actually worked, and do the conclusions survive when we evaluate them over multiple centuries rather than a few decades?

The Best Defensive Strategies: Two Centuries of Evidence

• Baltussen, Martens, and van der Linden
• Financial Analyst Journal, 2026
• A version of this paper can be found here
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Key Academic Insights

Two centuries changes the leaderboard
Most evaluations of defensive strategies are constrained by post-1980 data, which contains only a limited number of severe drawdowns. The authors extend the testing window to 1800 using a stitched deep-history dataset at monthly frequency. That materially increases the number of meaningful drawdown episodes and reduces the risk that conclusions are driven by a small set of modern crises.

The main winners are trend-following and factor-based defensive overlays
Across the worst 60/40 months, trend-following and a defensive factor overlay called DAR (defensive absolute return) stand out as the most reliable help. In the 10% worst 60/40 months, trend-following and the original DAR design both deliver positive average returns, and they work more often than not. Traditional equity factors like low-risk, quality, and value help too, but they tend to be weaker hedges than these two.

Gold looks like a hedge in recent history. In deep history it does not
Gold’s reputation as a safe haven is supported by some modern episodes, but the long sample does not support gold as a consistent defensive strategy for 60/40 drawdowns. In the authors’ tests, gold underperforms in the worst 60/40 months over the full sample. This is a useful corrective for portfolio construction that treats gold as a default hedge.

Put options hedge crashes but tend to be expensive insurance
Equity index put overlays deliver convex protection in sharp selloffs, but the long-run carry cost is meaningfully negative. The paper’s conclusion is consistent with prior work: systematic option buying is effective in the left tail, but it tends to reduce long-run portfolio returns unless used selectively or funded explicitly.

A smarter DAR keeps the protection and adds expected return
The original DAR portfolio is constructed by sorting a broad set of factor strategies by rolling correlation to the 60/40 benchmark. It goes long the most negatively correlated tercile and short the most positively correlated tercile, producing a negative correlation but near-zero long-run return by construction.

The authors propose DAR4020: long 40% of the most negatively correlated factors and short 20% of the most positively correlated factors. This preserves much of the defensive correlation profile while creating a net long exposure to factor premia. The result is a strategy that aims to provide protection with a more durable full-cycle return profile.

Trend-following and DAR4020 are complementary rather than substitutes
The paper documents a practical asymmetry. Trend-following is often less helpful at the start of drawdowns, particularly when declines are sharp and short-lived, because signals can be slow to reposition at turning points. DAR4020, by contrast, tends to provide immediate protection because it is structurally positioned with negative 60/40 beta. Over longer drawdowns, trend-following tends to “catch up” and often becomes highly effective. A blended allocation improves robustness across drawdown shapes.

Practical Applications for Investment Advisors

Treat defensiveness as a portfolio design problem, not a product choice

The evidence supports combining defensive sleeves rather than relying on a single hedge. A balanced overlay of trend-following and DAR4020 can reduce drawdown depth while maintaining a positive expected return profile, improving the likelihood that clients can hold the hedge through extended bull markets.

Prioritize strategies with positive long-run expected returns
A hedge that persistently loses money is difficult to maintain in practice, regardless of theoretical benefits in crisis months. The authors’ emphasis on defensive strategies with positive long-run returns is consistent with implementation reality: positive carry helps fund transaction costs and reduces the risk of abandoning the hedge before it is needed.

Stress test across regimes, not just crises you remember
The deep sample includes periods with very different monetary systems, wars, trade shocks, and inflation regimes. Defensive strategies that only work in the post-1985 world are fragile. The strategies that show resilience across radically different regimes are the ones you can discuss with a straight face in an Investment Policy Statement.

How to Explain This to Clients

““Most of the time, a balanced stock and bond portfolio compounds well. The problem is that there are periods when it experiences deep drawdowns, and those drawdowns slow wealth accumulation. This research looks across roughly two centuries and finds that the most reliable defenses are not the ones people often assume. Gold is inconsistent, and buying put options all the time is usually too expensive. The strongest approaches are systematic trend-following and a diversified defensive overlay built from strategies that historically move differently than stocks and bonds. Because each helps in different kinds of selloffs, combining them tends to produce more stable protection.”

The Most Important Chart from the Paper

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.

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.