(Cont...)
According to the survey, investors have several strategies
in place to protect against tail-risk events. “A number of approaches have
fallen somewhat out of favor [after the crisis],” O’Leary added. Before the
crisis, 81.4% of investors diversified across traditional asset classes to
mitigate tail risk. Now, that number has fallen to 75.7%. Conversely, investors
have increased their usage of alternative allocations such as property and
commodities (57.5% before the crisis, versus 65.1% now).
Survey respondents noted the following as effective hedges
against tail risk (ranked most to least effective): diversification across
traditional asset classes, risk-budgeting techniques, managed volatility equity
strategies, direct hedging-buying puts/straight guarantee, other alternative
allocation (e.g., property, commodities), managed futures/CTA allocation,
single strategy hedge fund allocation and fund of hedge fund allocation.
“Investors are concerned about tail risk … but their take-up
has been slow,” O’Leary said. Survey respondents noted the following barriers
in allocating to their tail-risk protection strategy: liquidity of underlying
instruments (64%); regulatory adherence/understanding (54%); risk aversion
(49%); transparency of underlying instruments (46%); fees/cost (42%);
understanding the investment returns/persistency of returns (33%); and lack of
general understanding of new asset classes (28%).
Despite challenges, things are looking up after the crisis:
73% say they believe that because of changes in their strategic asset
allocation, they are better prepared for the next major tail-risk event than
they were before the crisis.
“The vast majority of investors … feel that now, despite
what they’ve experienced in recent years, they are better protected against
downside risk going forward,” O’Leary said.
Corie Russell