There are different types of tail risk and what has occurred in the last 22 years in the equity markets may not relate much to what lies ahead. Tail risk protection will be of no use and even cause further losses. Access to the article requires a Premium Articles subscription or an All-in-One subscription.
There are different types of tail risk depending on the distribution of returns under consideration: daily, monthly, yearly, and other outcomes based on investment/trading styles.
Traders, and especially those using leverage, are interested in tail risk statistics in the daily timeframe, but unleveraged passive investors care more about long-term performance. Hedge funds may be anywhere in this spectrum depending on the leverage level. Some funds are even under-invested and consider tail events as opportunities to add to positions. Therefore, any references to “tail risk” are too broad when the specifics are not disclosed.
For example, after a 50% drawdown due to the GFC bear market, some leveraged investors and traders hit uncle point while some others found this an opportunity to add to their long-term positions. However, nothing of the sort that has occurred in the last 20 years after the 90s bull run will come close to what may lie ahead and affect everyone and any timeframe. We are not talking about a catastrophic event but market conditions that will be much different from those investors and traders have already encountered. Below is an example.
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Specific disclaimer: This report includes charts that may reference price target levels determined by technical and/or quantitative analysis. No updates to charts will be provided if market condition changes occur that affect the levels on the charts and/or any analysis based on them. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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