And one from last month. https://www.bloomberg.com/news/arti...nds-doubled-their-returns-on-volatility-spike Tail-Risk Hedge Funds Doubled Their Returns on Volatility Spike By Miles Weiss February 6, 2018, 3:00 PM CST LongTail Alpha bought VIX options for tail-risk funds Bhansali says his funds cashed in some of their VIX bets Vineer Bhansali, founder of LongTail Alpha, said this week’s sudden spike in market volatility fueled gains exceeding 100 percent at some of his tail-risk funds. Such funds, designed to protect investors against unexpected events that lead to market selloffs, often invest in options tied to the Cboe volatility index, known as the VIX. During the past several years, these options have become increasingly cheap as investors piled into bets that market volatility would remain subdued. That was until this month, when the VIX and related options started soaring. “People were selling catastrophic insurance for basically nothing,” Bhansali said Tuesday in an interview, adding that he is taking profits on at least some of his bets. “These things can turn around very quickly.” Bhansali worked as a managing director at Pacific Investment Management Co. in Newport Beach, California, before founding LongTail Alpha in the same locale in early 2016. Capula Investment Management of London and Universa Investments of Miami, two firms that also provide tail-risk hedging strategies, both declined to comment.
From the FT article here is a graphic on tail fund performance the last 5 years. These returns seem high to me but the source is HFR.
One more piece. This Q&A is good as it explains what I've been trying to say the focus of these products are. And that is "protection", not "prediction". https://finance.yahoo.com/news/nassim-taleb-tail-risk-hedging-000000014.html Yahoo Finance: You’re the Distinguished Scientific Advisor at the hedge fund of your longtime friend Mark Spitznagel, Universa Investments, a pioneer in tail risk hedging for institutional clients. What is tail risk hedging? The idea at Universa is protecting clients against extreme events, those that are rare and traumatic and can threaten their survival. Counter-intuitively, by minimizing clients’ vulnerability to extreme losses through things like put options, they tend to do much better over the long run. YF: Why is it important for investors to tail risk hedge their portfolios? And how should they do this? The point is that when someone is subjected to deep losses in a large part of their portfolio, they will spend an enormous amount of their investment time rebuilding that portfolio from those losses, and any future “alpha” that is excess return from the portfolio will diverge and long term it will be much lower. Why? Because unless someone has no “uncle points,” or infinite capital, extreme loss is deterministic and does not let people emerge from it. Look at the state of under-funding of the majority of pension funds after 2008. This problem for them is only worse now. Ruin doesn’t have to be a total loss. It can be something that forces someone out of the market at the worst possible time, or, say, a 60-year old person discovering that he or she can no longer survive on future retirement income. Also, someone who minimizes their exposure to ruin by tail risk hedging can gain greater exposure to the market in other times, as they don’t have the same risk of getting stopped out as someone else so they can invest larger and for longer. Let me explain with the following example. If 100 people walk into a casino and the people who bet their money on number 27 go bust, those who bet on number 28 will not be affected. The ruin of one person does not directly affect that of others. But, if on the other hand, a person plans to walk into a casino every day for 100 days and is bust on day 27, there will be no days 28, 29, …100. So it is a mistake to look at returns of the market if you don’t have the perfect staying power, and investors should do things like tail risk hedging to ensure the highest certainty of survivorship. What Mark is doing at Universa is just that: providing staying power and robustness for clients. YF: You and Spitznagel have been doing this for a long time. What have you learned? One should stay consistent, keep an iron discipline. Mark and I have been protecting against extreme risks for nearly twenty years together. During that time, we’ve seen tail hedgers come and go by following whims and not truly focusing long term on hedging. Universa is a true “hedge” fund, as it lowers portfolio uncertainty rather than adding to it. One needs to work very, very hard at calibrating the right kind of exposure and making sure it delivers a payout in a true crash, just like Universa did in 2008, while keeping costs minimal otherwise. Refining both sides of that pendulum is the most important, and it creates its own alpha for investors. Also one can’t view hedging in isolation. The portfolio package is what matters, and investors need to know you can’t achieve one without the other. YF: What are the biggest risks out there right now? The fact that the world, as a result of quantitative easing, has seen an asset inflation that benefited the uber-rich, and that nothing has been cured. One cannot cure debt with debt, by transferring from private to public sectors. The markets will ultimately crash again, although this time it will hurt a lot more people. YF: A lot of people throw around the phrase ‘black swan’ haphazardly. What do people most commonly get wrong when talking about black swans? They don’t get that what matters is to be protected against those tail risks that matter, something easier to do than trying to predict them. The idea is to focus on portfolio robustness rather than forecasts.
Were you on here in 2008? Did you call it? Come to think of it, I wonder what most ETers were thinking in 2008. "Wow, 20% is a BIG pullback, let's go all in!"?
“If you can stomach the negative carry, by all account go for it, but a low-vol fund doesn’t have that [cost of buying expiring options],” he says Mr Spitznagel says that investors should keep allocations to their funds as a small percentage of their overall portfolio, and another person familiar with the matter said Universa investors should expect to lose 1-2 per cent annually when markets are steady." Maverick, look at this and some of the negative returns for these tail risk funds I see in this thread and other threads, something just seems very weird here. If these funds on average lose 1-2 percent per year, and it seems this is probably a pretty optimistic number compared to some of the much larger negative returns I've seen, and when the market implodes the implosion is really never enough to cover up the loss years, why would any investor hold these, when they could just hold a small position in equities, hold most in short-term bond funds, and once the market implodes covert from the bond funds to more equities? You would get a better long term return which would almost certainly be positive, unlike many of these funds it seems, and you could tailor it to have very little material risk if you keep your equities piece small.
Did you read the above articles? LOL. Taleb actually explained it pretty well. Investors are path dependent. Meaning that in order to get outcome X they have to first get through x1, x2, x3...X. Example: say you playing Russian roulette. And there is a 1 out of a 100 chance you get the bullet. On 99 of the outcomes, you get a cash prize. One of the outcomes results in your immediate death. If you pull the trigger and are unfortunate enough to get the bullet on the first try, you never get the chance to realize the other 99 outcomes that result in the prize. That is what path dependency is. For investors, events like 2008 usually force liquidations. Part of it could simply be fear, part of it could be over leverage. But in the real world, a more common reason was the negative externality of the economy. People lost their jobs. Many lost their homes. Those who had investments had to sell them at the worst time so they could feed their families. Yes, this happens even to rich people. What Taleb was saying is that in a world were investors have no stops, no shortage of capital and no margin calls, sure they can sit through 50% to 80% drawdowns and whistle by the graveyard. But that is NOT the real world. So knowing that most investors are fragile to crisis, Taleb suggests, instead of trying to "predict" the one, he suggests trying to survive them by becoming more robust. Losing a few percent a year is not going to wipe you out. Let's do some math. If investor A makes 10% a year in the market, let's say they have 80% of their risk in a long index fund and 20% in the tail fund. Let's say the tail fund loses 5% a year. Their return in a good year will be (.80 X .10) + (.20 X -.05) = 7% Let's say a bad year is down 50% for stocks and the tail fund will go up 100% This gives us (.80 X -.50) + (.20 X 1) = -20%. So investor A will earn 7% a year vs 10% during the good years and during the bad year they will lose 20% vs 50%. More importantly that bad year they WON'T panic on the lows. They will actually stay in the market and get the recovery. In other words, when investor A draws that bullet on the first pull, they survive and enjoy the rewards going forward on the other 99 outcomes.
Had a small account being managed by Edward Jones. When I called them to take my money, the account representative fired off a bunch of reasons why I should keep my small account with them. He seemed so practiced at his spiel, I felt he was getting a lot of calls from people wanting to take their money out their accounts as well. This only increased my conviction that it was time to go to cash. If I knew back then what I know now, I would have used technical and reversion analysis and to short the market. I closed my Edward Jones account a couple of months before the top of the market, but did not publicize it, thus I don’t get credit for making a call. The market at the time had no solid underpinnings. Reminds me of Bitcoin today. To me, the only “value” Bitcoin has is that it is a volatile trading vehicle with an unusually large number of unsophisticated participants. This may increase the reliability of technical and sentiment indicators. Have yet to trade it and probably never will. When a market becomes volatile and appears to be trading at unsustainable levels, it is best to move one’s time horizon closer, even to the point of intraday trading, and to put an emphasis on technical analysis in their decision making process.
Ah, Mav, I indeed read all that, and it made perfect sense. I guess where maybe I was confused is my thinking that these tail-risk funds were meant for you to be able to put 100% (or some large portion) of your savings in, and protect you from the tail-risk. But what you are saying is the way these things work is that generally you should have the majority of your funds elsewhere (long positions), and a minority in these tail-risk funds. That would make complete sense to me. Well, as long being 80/20 long/tail-risk comes out better than (for example) 60/40 long/short-term bond fund. I.E. whether the extra complexity from being in part in the tail-risk fund gives a superior return to just investing less long in the first place and keep more in cash/cash equivalents, thus losing less on the down swings and having $$$ to invest at lower prices. One of those you posted had pretty darned good returns - but I know you posted your skepticism - will have to look back at that. Thanks! By the way, are there not funds that try and do the "all in one" thing - go long with the majority, but buy puts for protection? I'd love to see their overall returns over the years. Thanks!
Well now I really am confused. I re-watched the original Mark Spitznagel video. Universa. Looking at just that, seems at least that fund DOES include the long component and the tail-hedge component. I'll just have to study the numbers.