The Great Tail Risk Debate

In case you missed it this weekend, there was a big debate/mudslinging argument going on between alternative investing titans Nassim Taleb and Cliff Asness on Twitter over the long weekend. The quick summary was Asness of AQR fame essentially saying Tail Risk funds such as Taleb’s are dumb, and while work every now and then, the wait is too long and too expensive – and Taleb firing back saying essentially AQR doesn’t perform (we’ve weighed in on that before here, part II, and part III) and Asness’ math was all wrong.

 

We don’t necessarily have a dog in this fight, and believe it mainly boils down to investor preferences, fears, biases and behavior – with those that want more structural and real-time diversification choosing tail risk for its ability to deliver “right now” in a sell off like we saw in March; and those that are after more of a long term smoothing of an equity curve choosing diversification via long term positive expectancy strategies like trend following. We covered some of this in our post asking whether it’s too late to consider tail risk strategies now…, and were excited to see our friends at Resolve Asset Mgmt wade into the tail risk waters in a recent video happy hour (or you can listen to it here).

They cover a bunch of stuff in an entertaining back and forth ‘debate’ which is worth the listen:

  • What is tail protection, how do you define it?
  • Lots of people like idea of tail risk protection, but very few people pull trigger b/c obscure, tough to do.
  • Lots of flavors = puts, credit default swaps, delta hedging, gamma scalping, variance swaps, dedicated short swaps, short term trend, etc – what’s most liquid? What are carries on all?
  • When bounces back, people think – why do I need it now? Can you /should you try and time insurance
  • Do tail risk strategies have negative expectancy by definition?
  • The Taleb/Asness debate

And generally land on the fact that this is a very tough decision for investors, with many unwilling to pay the annual ‘deductibles’, no matter the downside in the future – feeling the deductible savings will outweigh the future losses; and others unwilling to have a potentially unlimited downside and willing/wanting to add tail risk protection even if it comes with an annual “drag” during the good years.

And for more on tail risk strategies and more from Resolve, check out:

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