"Grabbing the Black Swan by its Tail: Tail Risk Management for the Next Unforeseeable Crisis "

Dr. David P. Simon, Professor of Finance, Bentley University
Mr. David Hay, CFA, Managing Director, DGAM

The concept of "tail-risk" has circulated in academic circles for over half a century, and is nothing new. The recent Black Swan event -- an episode of global and synchronous cascading of asset prices ---however, has brought tail risk back front and center, and shone a spotlight on the deficiencies of MPT, diversification assumptions, and assumptions of "normality". Taleb has discussed this in many forums, arguing that the world of finance is not like that of physics--the timing and/or magnitude of future events cannot be estimated with a high degree of certainty: there will be unforeseen bouts of (usually downward) volatility. How can investors hedge, or even profit, from these events and which strategy is the best for certain types of investors? Our participants will explain and answer questions.

In the 1970s/80s, investors delta-hedged listed options with their associated path dependency and non-linear decay. In the 1990s, OTC-traded variance swaps made pricing simpler and precluded potentially messy trading programs. In the last decade, listed VIX futures and options became the preferred route to trade volatility (instead of variance). But are these strategies worthwhile or cost-effective? Should we be wary of the return drag inherent in any insurance-based strategy? Are there cheaper, yet still effective, methods that investors might prefer in today’s environment? Should tail-hedging strategies be implemented as an alpha engine or as a true hedge?

A three-course luncheon will be provided