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From Kirsten Bischoff, Opalesque New York:

With the roiling summer markets, news-making opinions such as Noster Capital’s anticipation of the second leg of the crisis, and the release of August Federal Reserve meeting minutes reflecting concern that “the committee would need to consider steps it could take to provide additional policy stimulus if the outlook were to weaken appreciably further”, it seems as though almost everyone is anticipating a backslide in the markets.

This bearish viewpoint has been in the background, a steady drumbeat anticipating further impending doom, since the financial crisis first started mid-2007. Its existence is likely a silver lining reflecting a change in investor focus on outlier risks (sometimes called “fat tail risk”).

But, while the feeling of impending volatility may be on radar screens now, typically investors do not focus on risk outliers when constructing their portfolio. In fact, such “fat tail” events occur five times more often than investors anticipate, says California-based alternative investment manager Welton Investment Corporation in a recently released paper called “Tail Risk” About 5x Worse Than You May Think”.

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