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”-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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