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

Medcraft's appalling speech
I am surprised. More than that, I am astonished, shocked. Last week I was left speechless by the address that the Australian Securities ...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

Fear and hatred is what I want for Christmas
Many years ago when I started work as a country school teacher students would often moan about how they thought it was unfair that ... read more
News Search   
VideoBrought to you by
Adviser Efficiency
The secret sauce to an enduring adviser-and-client relationship changes from time to time. One minute it's about the adviser's ability to provide expert advice around investments and the next minute, it's ... 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
State Street Global Advisors SPDR S&P 500 ETF
We invite you to watch our latest video program on FSiTV featuring State Street Global Advisors (SSgA) head of SPDR ETFs Amanda Skelly, as interviewed by Mark Smith, deputy editor of Financial Standard. In ... 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
DEC
19
JAN
28
Financial Standard Chief Economists Forum 2015 - Sydney
30
Financial Standard Chief Economists Forum 2015 - Melbourne
MAR
25
Digital Marketing for Banking & Financial Services 2015 Summit
FEB
02
The Diversity Dividend - The Male Champions Of Change
03
Hobart GenXt National Roadshow 2015
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 vOMvhVeY