Monica Woodley, managing editor at the Economist Intelligence Unit, said, “Tail risk has gained a considerable profile as a result of the major ‘shock’ events that characterised the financial crisis and the subsequent market volatility. Our research on behalf of SSgA sought to deepen understanding of the response of institutional investors to these market shocks and their remaining concerns.”

Changes in Tail Risk Mitigation Strategies

The data showed shifts in allocation – although interestingly, despite elevated concerns, the pace of change has been slower than expected. The widespread impact of tail risk events has resulted in a large proportion of investors reconsidering the products available to mitigate the impact of these events, beyond traditional diversification techniques. The survey showed gains in allocation to other alternatives, such as commodities and infrastructure, and managed futures/commodity trading advisor (CTA) strategies. The allocation to fund-of-hedge-funds declined significantly, with a 9 percentage point drop from pre-2008 figures.

Barriers to tail risk protection strategies

When asked to define the biggest challenges they face in allocating to their tail risk protection strategy, 64 percent of investors indicated liquidity of the underlying instruments. This statistic was followed by 54 percent who said regulatory adherence/understanding and risk aversion (49 percent).

Niall O’Leary continued, “The market is still very focused on the possibility of down-side events and methods to protect against them. This increased awareness and the willingness to guard against these events are encouraging, but the pace of adopting tail-risk strategies has been slow. Investors are still trying to decide which methods are best in terms of effectiveness and value, and some concern persists that the tools currently available to investors are not adequate enough.”

For a copy of the report Managing Investments in Volatile Markets: How Institutional Investors are Guarding Against Tail Risk Events,’ visit: http://www.ssgainsight.com/reports/Economist_Managing_Tail_Risk_Report_pr.pdf.

About State Street Global Advisors

State Street Global Advisors (SSgA) is a global leader in asset management. The firm is relied on by sophisticated investors worldwide for its disciplined investment process, powerful global investment platform and access to every major asset class, capitalization range and style. SSgA is the asset management business of State Street Corporation, one of the world’s leading providers of financial services to institutional investors.

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