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re: Looking for volatility/tail risk hedged equity fund or etf
Posted on 10/6/17 at 6:52 am to GenesChin
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.
Posted on 10/6/17 at 9:38 am to Doc Fenton
quote:
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.
What you are describing (assuming it is buying options) is effectively a utility cliff point/non continuous curve for unhedged risk scenarios though. I don't know the indepth details of this segment of utility theory, but I don't believe in principle that makes sense for a standard personal investor
For say insurance companies, that have regulated solvency requirements or investment firms that may have disintermediation risk from capital flight, that cliff exists as it triggers downside events correlated to market losses
quote:
I would say that deep-OOM options that are regularly rolled over will give you some pretty good returns, even on minor losses
Depends on what size tail risk hedge in place and investment time horizon.
You may be improving your conditional tail expectation returns, but it is going to absolutely tank your value at risk with this strategy
This post was edited on 10/6/17 at 9:52 am
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