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New research commissioned by State Street Global Advisors (SSgA), the asset management business of State Street Corporation (NYSE: STT), and written by the Economist Intelligence Unit (EIU), reveals that 71 percent of institutional investors believe it is “highly likely” or “likely” that significant tail risk event will occur in the next 12 months.
Many investors, hit hard by the substantial drawdowns of recent tail events, are much more wary about the course of the next tail risk event. The research shows that the crisis in the Eurozone, the prospect of global or European recession and the slow-down in China among the concerns.
SSgA commissioned the EIU to survey 310 institutional investors from across Western Europe and the US in June and July of this year. The findings are incorporated into a new report entitled “Managing Investments in Volatile Markets: How Institutional Investors are Guarding Against Tail Risk Events,” which reveals that although tail risk events are by definition unpredictable, investors have become far more sensitive to them, and are taking more proactive steps to reduce the impact they have on their investments.
A tail risk, or extreme shock to financial markets, is technically defined as an investment that moves more than three standard deviations from the mean of a normal distribution of investment returns. Only 20 percent of respondents are “very confident” that they have some form of downside protection in place for the next significant event, with a further 61 percent “somewhat confident” of this. However, 73 percent of institutional investors believe that due to changes in their strategic asset allocation, they are better prepared for the next major tail risk event than they were before the start of the financial crisis.
Niall O’Leary, managing director and head of EMEA portfolio strategy at State Street Global Advisors, said, “The report’s findings show that tail risk events are nearly always underestimated, but that given the occurrence of a number of these events in recent years, sensitivity amongst institutional investors to them has increased. However, the research also shows that the benefits of diversification as a tail risk mitigation approach are unclear and investors are not entirely confident that they are sufficiently protected from the next event. Adoption of tail-risk mitigation strategies has been slow, although a large majority of investors now see managing this issue as an integral part of a comprehensive investment plan.”