Robert Gingerish from Western Asset Management and Aashish Vyes from Silk Road Asset Management discussed Left and Right Tail Risk Hedging and Carry at RMC this afternoon.
The discussion covered leverage a portfolio as a way to mitigate the negative carry of tail hedging, seeking value across various markets, and using leverage to offset the negative carry of tail protection across different markets.
Gingrich defined tail risk as the risk of unusually large investment losses over a short period of time and mentioned that protection is normally in the form of a long put on the portfolio. He then covered many methods of creating tail protection such as paying for insurance, buying puts on your positions, selling or hedging when prices reach a certain level, buying index puts, or using more exotic strategies such as VIX related hedges. He also talked about carry neutral tail protection which may be done through selling calls to fund puts, buy receiver swaption contracts, selling at the money put and buying two out of the money puts for not cost, or levering up a portfolio to increase its positive carry.
Vyes started out asking why there is a need for tail risk protection. He give three reasons – the lingering memory of 2008 – 2009, failure of portfolio theory, and tail risk hedging being better than diversification in times of catastrophic losses. He also stated that several types of investors can benefit from tail risk hedging such as long term buy and hold managers, institutions with defined payment schedules and institutions that rely on stability of returns. He also goes on to mention that ‘tail risk’ events happen more often than most investors realize.