How to hedge tail risks?

[ExtremeWays]

Anyone got ideas?

 

[Mecisteus]

There are so many ways:

1) Sell before the crash
2) Don't invest/trade at all. zero tail risk
3) Use other people's capital
4) If using own capital, just put in max $500 only. Minimize tail risk

 

[Shiny Things]

Anyone got ideas?

The time-honoured way to hedge tail risks is to buy low-delta put options on whatever you're trying to hedge, whether that's stocks, bonds, commodities, whatever.

You're going to find that this is a money-losing strategy, though. There's no such thing as a free tail hedge; you have to pay for it somehow. And there's usually a systematic and significant cost for things that count as "tail risk hedges", whether that's SPX index puts, VIX calls, or even having a bond position to offset your stock position (because bonds tend to underperform stocks over the long term).

Everyone's favorite drunken Twitter uncle Nick Taleb knows this very well, he's blown up at least two hedge funds by systematically "hedging tail risk" all the way up in the face of two giant market rallies.

Think of it this way. If you want to chop off the left tail - the big, low-probability losses - of your returns, you have to pay for that somewhere. Either you pay for it upfront (through paying option premium), or you pay for it somewhere else (say, by giving up the big, low-probability gains as well as the losses; this is called a zero-cost-collar).

 

[Mecisteus]

Rule #1 in hedging.

There is no free lunch. There is a cost associated to every kind of hedge.

 

[BBCWatcher]

There's an interesting 2015 film called The Big Short that dramatizes the run-up to the Global Financial Crisis. One interesting aspect of the story is that a few extremely sophisticated investors (including a team at Deutsche Bank, oddly enough) made heavy bets that the housing market (and its associated derivatives, particularly CDOs) would blow up -- they bet on what should have been a rare catastrophe, a long tail risk. What they discovered is that, when disaster finally struck, the other bettors (and the ratings firms, which were corrupt) didn't, or couldn't, honor their sides of the bets. In other words, these investors had bet correctly, but when a "space rock" hits then the casino might not be open to redeem your chips.

What ended up happening is that these particular investors still did well. But they had to close out their favorable positions prematurely to capture whatever profits they could. The meltdown was so bad, they barely escaped with only a fraction of the mathematical profits they should have enjoyed.

As entertainment I don't think this film works too well, but as some insight into complex financial markets, it's helpful. There are also some terrific individual performances. In particular, Christian Bale seems able to immerse himself in any character, and he does it again in this film.

 

[kannis_ng]

The time-honoured way to hedge tail risks is to buy low-delta put options on whatever you're trying to hedge, whether that's stocks, bonds, commodities, whatever.

You're going to find that this is a money-losing strategy, though. There's no such thing as a free tail hedge; you have to pay for it somehow. And there's usually a systematic and significant cost for things that count as "tail risk hedges", whether that's SPX index puts, VIX calls, or even having a bond position to offset your stock position (because bonds tend to underperform stocks over the long term).

Everyone's favorite drunken Twitter uncle Nick Taleb knows this very well, he's blown up at least two hedge funds by systematically "hedging tail risk" all the way up in the face of two giant market rallies.

Think of it this way. If you want to chop off the left tail - the big, low-probability losses - of your returns, you have to pay for that somewhere. Either you pay for it upfront (through paying option premium), or you pay for it somewhere else (say, by giving up the big, low-probability gains as well as the losses; this is called a zero-cost-collar).

Nick is afraud?

Or only game is the bankers?

 

[w1rbelw1nd]

TS sounds like he is trying to do what this satki investor is doing... Perhaps can learn from him as well!

http://www.straitstimes.com/business/invest/just-20-and-his-assets-are-worth-over-100k

 

[Shiny Things]

Nick is afraud?

Taleb's not a fraud, he's just a crank. He used to be a pretty legit options trading theorist, back in the days of Dynamic Hedging, and he's a useful voice of reason against the tide of stupid short-vol strategies (martingales, leveraged bonds, TARFs) that washes up every so often. But he's descended into picking fights with people on Twitter and bragging about how much he can deadlift.

 

[ExtremeWays]

Taleb's not a fraud, he's just a crank. He used to be a pretty legit options trading theorist, back in the days of Dynamic Hedging, and he's a useful voice of reason against the tide of stupid short-vol strategies (martingales, leveraged bonds, TARFs) that washes up every so often. But he's descended into picking fights with people on Twitter and bragging about how much he can deadlift.

It's just marketing gimmick.....