Title: Tail Risk Hedging: An Alternative Approach to Risk Management -
Headings: Tail Risk Hedging: An Alternative Approach to Risk Management
Tail Risk Hedging: An Alternative Approach to Risk Management
Figure 1: Allocate Capital According to the Attractiveness of the Opportunity
Overview
Diversification via Asset Allocation
Figure 2: 10-year Rolling Returns
The Painful and Rarely Successful Strategy of Market Timing
Different Risk Profiles
In Practice
Tail Risk Hedging (TRH)
Precise Risk Targeting
Timing
The Cost of Certainty
Potential Products for Tail Risk Hedging
Product Dynamics
The Big Short: A Comparison
Conclusions 4

Content: One might think that investment professionals who are dedicated to analyzing investments and strategies in a scientific manner would arrive at similar conclusions. This is not that case. Different people interpret the same data differently. Last but not least, emotions and behavioral biases can trump all of the data and analysis in the world. Whether investors are aware of their own tendencies or not, behavioral psychology has now become a major focal point for many investors, investment professionals, and academics due to its significant impact on investors. Given the inherent fickleness of human nature, this inserts yet another layer of detachment between fundamentals and market prices. Emotions are not based on rational thought but impulses and instincts. Accordingly, attempting to predict the emotional component of investor behaviors is tantamount to predicting irrational behaviors. While Dan Ariely (author of Predictably Irrational) might disagree, this is virtually impossible. Investors can change their moods in an instant and this injects additional noise into market prices.