Developing Tail Risk Strategies

[OddTrader]

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Additionally, conference delegates are invited to attend the Research Foundation Workshop for the Practitioner on Sunday, 19 May, for a chance to learn more about managing portfolios to protect against tail risk.
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Monitoring, Managing, and Hedging against Tail Risks

http://annual.cfainstitute.org/2013...ring-managing-and-hedging-against-tail-risks/

 

[OddTrader]

The Challenges in Hedging Tail Risk

http://dealbook.nytimes.com/2012/04/20/the-challenges-in-hedging-tail-risk/

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In the event of the loss, however, the insurance buyer can expect to be paid much more than the annual cost of the insurance. Unfortunately, we cannot currently say the same thing about insuring a stock portfolio against a major loss. For instance, it would cost nearly 4 percent in premium to buy a put option that starts to pay off after the market falls 15 percent over a one-year period. Because of this high cost, the option would lose money until the market fell by 19 percent. And even if the market falls further and the option pays off, the return on premium will be much lower than in the example of general insurance.
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http://allaboutalpha.com/blog/wp-content/uploads/2010/05/Tail-Risk-Hedging-May2010.pdf

"Tail Risk Hedging: A Roadmap for Asset Owners"


http://blogs.reuters.com/felix-salmon/2011/07/01/why-you-cant-hedge-tail-risk/

Why you can’t hedge tail risk

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The number of US-based institutional investors that investigated (and continue to investigate) tail-risk hedging is absolutely massive. Having very recently left a role as a derivatives specialists (listed index option-based strategies) at a $300B asset management group I can assure you that the number of accounts that we ran some form of tail-risk overlay for become substantial. Yes, the dedicated collateral to those overlays in tiny because of the efficiency of the margin requirements attached to listed index options, but the notional values they are structured to protect are substantial, and growing.

There is no such thing as a cheap put, true, and that is what many misguided clients came to us looking for. Still, the idea that the industry hasn’t evolved to the point where large asset allocators are now sophisticated enough to evaluate and implement option-based hedging approaches just isn’t correct. From targeted volatility funds to using options spreads like collars, put-spread collars, and condors to fund long put positions. These strategies have real and growing traction.

Posted by BRM_3

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[Sergio77]

If you chase tail risk there may not be anyone to pay you when the event happens.

 

[phattails]

Quote from etfarb:

Just finished fooled by randomness and taleb is a god.

I want to focus more energy on developing tail risk strategies in the short term.

How should one approach such a task?

Do you trade options? how much capital do you have? can u daytrade? Do you pay retail commission or pro?

 

[etfarb]

Quote from phattails:

Do you trade options? how much capital do you have? can u daytrade? Do you pay retail commission or pro?

yes, 5000, yes, and yes to pro

 

[phattails]

$5000 and pro? Is that a deposit for a prop firm?

 

[Maverick74]

A couple of things here about Taleb. One, there is this misconception that his strategy is to bet on crashes. And that his strategy is simply to buy DOTM puts. However, that comes from a serious misunderstanding of what he actually does. First of all, his funds that carry his name that are managed by Mark Spitznagel sell as much premium as they buy. Second, they don't bet on crashes. They have a fundamental belief that the long tails are undervalued in price when using a standard Gaussian distribution. They believe there is value in these tails. So they try to extract that value the best they can. Many times that is the downside in a stock index. Other times it might be the downside in bonds, the upside in commodities, etc.

Taleb launched a tail risk etf last year so you can track it's performance yourself instead of listening to second hand knowledge from bloggers.

http://www.horizonsetfs.com/pub/en/etfs/?etf=HUT&r=o

It's pays just under 3% in dividends which likely come from the fixed income products they invest in. The principal is up about 1/2% over the last 12 months. Not bad considering the VIX is down about 40% and there has been zero volatility to speak of. But they are hardly bleeding to death. In fact they are yielding more money then treasuries with the long tail kicker on top. Or to put it a different way, they are synthetically long treasuries and will profit immensely when Treasuries actually blow up.

On that link I provided above you can click on the holdings and see that they sell as much premium as they buy and they are not even long that much premium.