Monitoring, Managing, and Hedging against Tail Risks

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Efficient asset allocation can be a problem for portfolio managers trying to protect against tail risks without sacrificing opportunities to generate returns. Managers could pay too much to protect against events that are unlikely to happen, but there is also the danger that substantial risks will be overlooked because of shortcomings in the methods being used to measure them. In Singapore this May, practitioners will have an opportunity to hear experts discuss ways to resolve these issues.

The Research Foundation of CFA Institute, which promotes the development and dissemination of relevant research for practitioners worldwide, will be hosting the Research Foundation Workshop for the Practitioner in advance of the 66th CFA Institute Annual Conference in Singapore. This year’s workshop focuses on ways that portfolio managers can identify and protect against tail risk, along with some opportunities to hedge against tail risk more efficiently that asset managers may be overlooking.

According to Pranay Gupta, CFA, chief investment officer at Lombard Odier Darier Hentsch and co-author of “Risk Management in a Multi-Strategy Framework,” some of the most widely applied risk measurements have significant shortcomings. During his session at the Research Foundation Workshop, Gupta will review some of these shortcomings and identify practical ways that managers can compensate for them.

During his session at the workshop, Robert B. Litterman of Kepos Capital will discuss the ways that portfolio managers can — and should — hedge tail risk. As Litterman noted in the Financial Analysts Journal, purchasing equity tail-risk insurance is the most expensive way to reduce a portfolio’s equity risk when other options, such as selling equity, are available. Litterman will examine both sides of the market for equity tail-risk insurance products, looking at which firms are natural buyers of such risk and which firms should consider selling it.

The Research Foundation Workshop, which takes place on Sunday, 19 May, will be moderated by William Fung of London Business School. Practitioners interested in exploring the concepts of portfolio tail risk and effective ways to hedge against it will be able to attend the workshop as part of their registration for the Annual Conference.

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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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