Nassim Taleb identifies the tail risk exposure investors should hedge – Yahoo Finance

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Nassim Taleb

In recent weeks, we’ve seen geopolitical risks rise with tensions escalating in North Korea. Meanwhile, Hurricane Harvey brought human tragedy and billions of dollars worth of economic devastation to eastern Texas.

As investors consider what these events mean for their portfolios, we asked Nassim Taleb to share his perspective. Taleb, the author of “The Black Swan” and “Antifragile,” is the Distinguished Scientific Advisor to Universa Investments, an investment management firm that specializes in convex tail hedging and investing.

In an email exchange on Friday, we asked Taleb about how investors should think about a risk like North Korea, where decades of saber-rattling has yet to evolve into a major military conflict.

“Investors should think in terms of general uncertainty, not ex-post specific situations,” Taleb said. “North Korea is in the realm of things more of a journalistic event than a true physical or economic threat. Consider how tiny the country is compared to the US.”

The tail risk investors should hedge

We then asked about Hurricane Harvey and its implications for investors.  But Taleb pointed us to the years of easy monetary policy brought on by central banks since the financial crisis. This is a relevant concern for investors as the Federal Reserve has been slowly hiking interest rates and is considering reducing its balance sheet.

“We have more permanent threats: a stock market fueled by almost a decade of easy money,” Taleb wrote.

Central banks around the world pumped trillions of dollars of liquidity into the financial markets, which experts say helped send the stock market to record highs.

“This is the tail risk — and is independent of the newspaper threat du jour,” he said. “All investors now have and should hedge this exposure — much like a driver should own car insurance especially if they plan to drive on a road they know is particularly dangerous.”

In recent months, top fund managers including Jeffrey Gundlach and Paul Tudor Jones have been buying put options on the SPDR S&P 500 ETF (SPY) to position themselves for what could become a big sell-off in the stock market.


Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.

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