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re: Looking for volatility/tail risk hedged equity fund or etf
Posted on 10/5/17 at 9:51 pm to Doc Fenton
Posted on 10/5/17 at 9:51 pm to Doc Fenton
quote:
Those two goals tend to blur together for me.
Try having a zero cost collar on FX and watching profits be handed away while the strike never hits while your put strike doesn't hit
Or having a collar on interest rates in Japan that never pay out as rates slowly crawl to 0
quote:
I suppose some people could have a concrete preference for one or the other in certain situations, but I'm thinking about insurance in terms of utility maximization across a range of distributions.
Utility theory suggests everyone's utility is different though. What you are suggesting though is an extreme risk aversion curve. It's effectively the opposite of diminishing marginal returns in that each marginal $ lost is an even bigger blow to utility
Got to remember you are heavily weighting tail scenarios utility loss in order to justify acceptable high probability minor losses in the leadup to the tail scenario
Posted on 10/6/17 at 6:52 am to GenesChin
quote:
What you are suggesting though is an extreme risk aversion curve.
I don't think I am. If you are willing to accept minor volatility in exchange for higher average returns, then it also makes sense that you might want to hedge more against maximum drawdown risk. That's the case for tail hedging.
It's the other sort of insurance (e.g., the ordinary 60-30-10 portfolio) that has more risk aversion.
And if you look at who cares about maximum drawdown risk, it is typically people (PE firms, VC firms, algo traders, etc.) who engage in the riskiest sorts of investments.
quote:
Got to remember you are heavily weighting tail scenarios utility loss in order to justify acceptable high probability minor losses in the leadup to the tail scenario
I would say that deep-OOM options that are regularly rolled over will give you some pretty good returns, even on minor losses. How much depends on the maturity date, of course, but it's not as if portfolio insurance better constructed to capture tail risk is an all-or-nothing proposition on its payouts.
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