What can go wrong for the markets?

“Like Chicken Little, we can't know with any certainty what the greatest risk will be in the future. That suggests a broad hedge against risk is prudent – especially when it's inexpensive. Risk management is not just for chickens”

“Like Chicken Little, we can't know with any certainty what the greatest risk will be in the future. That suggests a broad hedge against risk is prudent – especially when it's inexpensive. Risk management is not just for chickens”-Vineer Bhansali, PIMCO

Below Summary by Chris Walker

A team of portfolio risk specialists from global investment firm PIMCO, in drawing up a list of events that could derail world markets, were able firstly, to arrive at a particularly long list of potential risks, and secondly, conclude that a suite of tools are essential for structurally sound portfolio construction and the mitigation of those diverse risks.

The tools include a combination of dynamic risk balancing, diversified beta sources, explicit options-based tail hedging and a minimum amount of liquidity. Furthermore, given how inexpensive tail hedging is today, the team concluded that the risk-reward trade-off also favours hedging.

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