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“If you don’t have tail coverage, I suggest that not being in the market we face great uncertainty.”
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That is the author of “Black Swan: The Impact of the Highly Unlikely”, Nassim Nicholas Taleb, who offers his point of view on the risks that arise in the market and a growing lack of clarity about the future in the era of a pandemic. deadly that has created a public health and economic crisis.
Speaking during a CNBC interview on Friday, the popular author shared the notion that investors should be protected against so-called “tail risk,” which refers to extreme events that have a low probability of occurring in a distribution of earnings. . Taleb has dedicated his career to chronicling so-called “tail risk” events, which have a small probability of occurrence, but which nevertheless take place more frequently than might be assumed, and therefore the investment community generally underestimates them.
Taleb said the current market outlook, perhaps, has amplified uncertainties, even if the stock market has mostly increased, despite signs of a COVID-19 pandemic that is intensifying in some places and threatening with projections of “V” in shape “, or rapid economic recovery.
“We are printing money as if there is no tomorrow,” Taleb said, referring to the Federal Reserve’s efforts to ease the financial pain of the epidemic by delivering billions of stimuli to the market. The Fed also cut interest rates to a super low range of 0% and 0.25% in March, and it may not have much room to further ease the economic pain of the viral outbreak and other problems that could arise amid this crisis. .
“And COVID seems to be there, even if the pandemic … goes away, there will still be people cautious enough that it will impact many industries,” he said.
Hedge funds designed to take advantage of tail risks have enjoyed a remarkable recovery in the COVID-19 era.
For example, the Cboe Eurekahedge Tail Risk Volatility Hedge Fund Index has returned 48.19% so far this year. In comparison, the DIA Jones Industrial Average DJIA,
is close to 12% so far in 2020, the S&P 500 SPX index,
is down 6.2% and the Nasdaq Composite COMP,
It is up almost 10% so far in 2020.
Meanwhile, Universa, managed by Mark Spitznagel, returned a staggering 4,000% return on its tail risk fund during the height of the pandemic. Taleb has also been an advisor to that fund.
It can certainly be key to protect your portfolio from such tail risks, rather than gambling on them. Investment funds that have attempted to bet only large sums in the market crisis have tended to underperform, writes the Wall Street Journal. This is because those bets on steep declines have not benefited from subsequent rebounds in the market.
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