Here is an overview of a Tail Risk panel to be held on September 6th at CBOE’s inaugural Risk Management Conference – Europe —
Tail Risk Protection: A panel discussion on why and how investors might hedge downside risk
– The case for hedging as an offensive strategy in today’s market
– Determining acceptable levels of protection and costs
– Strategy alternatives for implementing hedges
Moderator: Ryan McRandal, Portfolio Manager, AXA Investment Managers
Alex Capez, Portfolio Manager, Occitan Capital Partners
Fabio Castaldi, Head of Absolute Return, Amundi Asset Management
Sandy Rattray, Head of Man Systematic Strategies, Man Group
Chris Rodarte, Portfolio Manager, Pine River Capital Management
INDEXES, TAIL RISK PROTECTION, and DIVERSIFICATION
The first chart below shows October 2008, a month in which the S&P 500 Index dropped by 16.8%. The spot gold price and the S&P GSCI commodity index also experienced steep declines that month, and some investors have lamented the fact that, as the stock indexes fall, many other indexes tend to go down, and correlations among indexes tend to rise. However, the VXTH Index actually rose that month.
The CBOE S&P 500 95-110 Collar Index (CLL) (www.cboe.com/CLL) buys SPX puts for protection and sells SPX calls for income. The histogram below covers a 26-year period and shows that the S&P 500 Index had 13 months with losses greater than 12%, while the CLL Index had only one such month.
Exhibit D of the paper by Asset Consulting Group – “Key Tools for Hedging and Tail Risk Management” (February 2012, available at www.cboe.com/benchmarks) shows the performance of three indexes –
Investors might re-think some traditional diversification strategies after seeing the charts above.
LINKS TO ADDITIONAL INFORMATION:
Volatility indexes www.cboe.com/volatility
CBOE Volatility Index® (VIX®) (with put-call ratios, CFE, charts, bibliography, etc.) www.cboe.com/VIX
Papers on Income Enhancement and Tail Risk Management www.cboe.com/benchmarks
CBOE Risk Management Conference in Ireland – Sept. 5 – 7 2012 www.cboermc.com/Europe