Wednesday, July 14, 2010

Tail Risk

Felix Salmon looks at whether it's possible to hedge tail risk, and a new fund that claims to do just that. Tail risk, for those of you who don't deal with this stuff often, is the risk that something is very unlikely, but also very bad if it happens.

the idea behind the fund is that it will soar in the event of extreme market chaos. It’s a productized form of tail risk hedging, and it gives a pretty good indication of how difficult and how expensive true tail-risk hedging really is. Especially since there’s no guarantee that the fund will actually work as hoped.

FLG kinda views this like worrying about being hit by a meteor. It's highly unlikely, but also very bad. Nevertheless, I'm not living in an underground bunker or wearing a Kevlar suit in the vain hope it will protect me if the worst happens. When it comes to financial tail risk, you can keep part of your portfolio in cash to hopefully weather the storm, but ultimately sometimes you just have to accept some risks.

1 comment:

Robbo said...

I always thought "tail risk" had to do with groupies and STD's.

 
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