Tail Risk Strategies Questioned

Insurance against rare market calamities sounded like a great idea in the aftermath of the 2008-2009 crisis. Tail-risk funds were launched and attracted customers. The usefulness of these is now in question as investors recognize the quandary posed by heavy losses disaster hedging often brings.

Thus one such fund, started toward the end of 2010 by Boaz Weinstein’s Saba Capital, has taken investors on quite a wild ride. In its first 15 months or so Saba Capital Tail Hedge went down as much as 30%. More recently it made big profits, it part by taking the other side of the trades that the JP Morgan “whale” lost billions on, according to HedgeFundAlert.

The problem, says an investor, is that you don’t want to commit much capital to a strategy that is in fact very volatile and loses money a lot of the time. Only 2% or 3% of a portfolio tends to be allocated to tail-risk funds, if at all. But that means when the strategy works, its contribution to the overall return is very small.

The insurance is in effect too expensive because of the volatility. So investors don’t want to buy much of it and as a result it doesn’t provide much protection for the portfolio at large in situations when it’s supposed to.

Mr. Weinstein is a well-known manager but his name recognition is not all for happy reasons. He was in the news during the crisis on account of a heavy loss by a credit trading desk at Deutsche Bank, which he headed at the time—to be fair, he didn’t lose any more than other trading desks and probably less than some.

Saba attracted several billion dollars of assets despite Mr. Weinstein’s Deutsche Bank mishap. Tail Hedge is only a small part of the firm.

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One Response to “Tail Risk Strategies Questioned”

  1. The Joy of Randomness | HedgeFundSmarts Says:

    […] But such investments themselves are highly volatile and can lose a lot quickly—click for an example. […]

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