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Alternative Market Briefing

Understanding tail-risk hedges and funds - part two

Monday, July 23, 2012

Damian Handzy
Bailey McCann, Opalesque, New York :

In our previous installment of this series, we laid out a basic introduction to tail-risk that outlined what it is, its most common variations, and discussed the debate around whether these events can be adequately hedged. In this installment, we will take a deeper view with two risk experts who say that investors should be employing tail-risk hedge strategies.

The Paradox

"Tail-risk funds are going to be popular until the markets improve again," says Damian Handzy, CEO of Investor Analytics, a US-based risk management firm.

Tail-risk is often simplified as an insurance policy against adverse market events, akin to a homeowner's policy. On the surface this looks like an easy sell, however, the same people that can readily imagine various levels of home destruction often have a difficult time imagining portfolio destruction. This is especially true at the top of a market - the precise point when investors should have a tail-risk plan in place. "Tail-risk protection is needed the most at the top of the market, but people start panic buying at the correction, when it's too late and too expensive," he says.

Part of the problem is that tail-risk strategies in of themselves aren't especially cheap at any point. It is less expen......................

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