Register  
AllianceBernstein launches tail risk protection strategy
Friday, 24 May 2013 11:30am

Tail risk, or the risk of suffering losses greater than statistically normal ranges, is a much greater threat to portfolios than volatility, global asset manager AllianceBernstein warns.

Tail risk takes its name from the shape of the bell curve, in which statistically normal outcomes fall along the "dome" of the bell and extreme outcomes tail off at either end, with negative outcomes on the left and positive ones on the right.

"The problem with the concept of volatility as it is typically understood by risk-aware investment strategies is that it assumes a normal pattern of returns, such as that described by the bell curve diagram of probable outcomes commonly used in statistics," said Michael DePalma, AllianceBernstein's New York-based chief investment officer for quantitative investment strategies, during a visit to Australia this week.

"But we know from experience-particularly since the 2008 financial crisis-that extreme outcomes are likelier in reality than the probability implied by a normal distribution."

According to AllianceBernstein research, negative tail events have occurred more frequently in global financial markets in recent years than would historically be expected - a total of nine tail events have occurred since 1988 instead of the anticipated six.

To help investors mitigate the losses from tail-risk events, and at the same time achieve consistently positive investment returns across the investment cycle, AllianceBernstein has launched a strategy known as Tail-Risk Parity (TRP).

"TRP takes the concept of risk parity, in which capital is allocated so that each asset-class contributes equally to overall portfolio volatility, and improves upon it by rejecting volatility as the measure of risk, using tail risk instead," explained DePalma.

"TRP uses signals from the option markets, rather than historical price data, as a guide to expected tail losses."

AllianceBernstein was helped in the development of this forward-looking methodology by Nobel Laureate Myron Scholes, co-creator of the Black-Scholes option pricing model.

"We believe that TRP can help deliver balanced portfolios that cost-effectively reduce exposure to tail losses at times of market turbulence and which can also participate in market upside during more normal conditions," said DePalma.

Blogs
Follow the industry experts.
Christopher Page
Christopher Page
Managing Director

A new regulator? Better empower ASIC
The Australian financial services industry and Australia's financial advisers already have regulator dedicated to policing standards ...read more
 
Benjamin Ong
Benjamin Ong
Chief Economist

Reflation, rotation and the taper
'Tis being my final type (drivel, to some gentle readers) for the year, we'll take a look back at the 2013 that was to seek the lessons ... read more
 
Alex Dunnin
Alex Dunnin
Director of Research & Editorial Services

Thought leadership and the art of living dangerously
Superannuation is one of the Australian economy's major pillars and it is time its leaders stepped out from behind their abacuses and ... read more
News Search   
VideoBrought to you by
Managed Accounts Forum 2014 Highlights
Around 150 delegates attended Financial Standard's inaugural Best Practice Forum in Managed Accounts held in Sydney in August. Financial Standard also launched a new magazine: FS Managed ... Watch video
The New Neutral
At this year's PIMCO Secular Forum, the company's global executives set themselves the challenge of taking a three to five year view and anticipate where the market would be against what investors would ... Watch video
Zurich Investments Global Growth Share Fund
The pool of investable funds in the retail sector is ever growing, and as investors become more sophisticated the appetite for global equities is only going to increase. In this video, Noble says with ... Watch video
Why Multi-Asset Solutions?
Joe Fernandes, Head of Global Investment Solutions at Colonial First State Global Asset Management talks about the advantages of objective-based investing in the multi-asset space. Watch video
Introduction to Series #07
What are the key challenges advisers face when building retirement portfolios for clients? Watch Joe Fernandes, Head of Global Investment Solutions at Colonial First State Global Asset Management. Watch video
Colonial First State Multi-Asset Real Return Fund
Find out more about the investment philosophy and objective of the Colonial First State Multi-Asset Real Return Fund. Senior Portfolio Manager, Kej Somaia explains. Watch video
Get it
Daily
FREE to your inbox, get the Financial Standard Daily Email.
Get the Free
iPad app
Download the Financial Standard iPad app for FREE
Industry
Events
OCT
31
NOV
05
ALTERNATIVE INVESTMENTS 2014 CONFERENCE
12
Global CIOS Symposium
13
2014 Financial Standard Social Media Influence, Leadership + Excellence Scholarship Program (SMILEYS)
21
SelectingSuper Awards 2014
DEC
02
FEAL - La Trobe Financial National Achievement Awards
News
Bites

$245 (inc GST) for 1 year
 
 
Copyright © 1992-2014 Rainmaker Group
All material on this site is subject to copyright. All rights reserved. No part of this material may be reproduced, translated, transmitted, framed or stored in a retrieval system for public or private use without the written permission of the publisher.
Link to something lehXzXJL