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According to the survey, investors have several strategies in place to protect against tail-risk events. “A number of approaches have fallen somewhat out of favor [after the crisis],” O’Leary added. Before the crisis, 81.4% of investors diversified across traditional asset classes to mitigate tail risk. Now, that number has fallen to 75.7%. Conversely, investors have increased their usage of alternative allocations such as property and commodities (57.5% before the crisis, versus 65.1% now). Survey respondents noted the following as effective hedges against tail risk (ranked most to least effective): diversification across traditional asset classes, risk-budgeting techniques, managed volatility equity strategies, direct hedging-buying puts/straight guarantee, other alternative allocation (e.g. property, commodities), managed futures/CTA allocation, single strategy hedge fund allocation and fund of hedge fund allocation. “Investors are concerned about tail risk … but their take-up has been slow,” O’Leary said. Survey respondents noted the following barriers in allocating to their tail-risk protection strategy: liquidity of underlying instruments (64%); regulatory adherence/understanding (54%); risk aversion (49%); transparency of underlying instruments (46%); fees/cost (42%); understanding the investment returns/persistency of returns (33%); and lack of general understanding of new asset classes (28%). Despite challenges, things are looking up after the crisis: 73% say they believe that due to changes in their strategic asset allocation, they are better prepared for the next major tail-risk event than they were before the crisis. “The vast majority of investors … feel that now, despite what they’ve experienced in recent years, they are better protected against downside risk going forward,” O’Leary said.
According to the survey, investors have several strategies in place to protect against tail-risk events. “A number of approaches have fallen somewhat out of favor [after the crisis],” O’Leary added. Before the crisis, 81.4% of investors diversified across traditional asset classes to mitigate tail risk. Now, that number has fallen to 75.7%. Conversely, investors have increased their usage of alternative allocations such as property and commodities (57.5% before the crisis, versus 65.1% now).
Survey respondents noted the following as effective hedges against tail risk (ranked most to least effective): diversification across traditional asset classes, risk-budgeting techniques, managed volatility equity strategies, direct hedging-buying puts/straight guarantee, other alternative allocation (e.g. property, commodities), managed futures/CTA allocation, single strategy hedge fund allocation and fund of hedge fund allocation.
“Investors are concerned about tail risk … but their take-up has been slow,” O’Leary said. Survey respondents noted the following barriers in allocating to their tail-risk protection strategy: liquidity of underlying instruments (64%); regulatory adherence/understanding (54%); risk aversion (49%); transparency of underlying instruments (46%); fees/cost (42%); understanding the investment returns/persistency of returns (33%); and lack of general understanding of new asset classes (28%).
Despite challenges, things are looking up after the crisis: 73% say they believe that due to changes in their strategic asset allocation, they are better prepared for the next major tail-risk event than they were before the crisis.
“The vast majority of investors … feel that now, despite what they’ve experienced in recent years, they are better protected against downside risk going forward,” O’Leary said.
Corie Russelleditors@plansponsor.com