More by the Same Author
2013-01-24 Tail Risk Hedging: It Pays to Be Countercyclical by Vineer Bhansali of PIMCO
The cost of hedging in absolute terms is back to pre-crisis lows. Quiet markets, low volatility and a lack of visible risks on the horizon can lead to complacence and increasingly dangerous, leveraged positions. Many credit markets have been direct beneficiaries of the belief in seemingly lower tail risks in equity markets, and could also end up suffering if there is a re-emergence of widespread fear of, and upward repricing of, these tails. Investors should consider taking this opportunity to reload their hedges as soon as they can.
2012-12-20 Rolling Tail Hedges: The Dynamic Tradeoff between Cost and Potency by Vineer Bhansali of PIMCO
In our hypothetical illustration, rebalancing tail risk hedges more frequently than once a year offers some benefit under all volatility curves (ignoring transaction costs) but the benefits are greatest when the volatility curve is flat or steep. Some of the benefits of rebalancing can quickly disappear if the transactions costs are large. Two key points for investors to consider: Hedging has to be a systematic, repeated, asset allocation decision to obtain best long-term benefits, and the hedge program has to be active and consider pricing levels so efficient rebalancing can be implemented.
2012-05-10 Benchmarking Tail Risk Management by Vineer Bhansali of PIMCO
While tail risk hedging is a critically important area of modern portfolio management practice, the relative newness of the area means standard frameworks for benchmarking such portfolios have not developed. In fact, weve found that once the framework for proper tail hedge construction is defined based on key guidelines (including exposures, attachment, cost, and basis risk), the task of creating a proper index becomes relatively straightforward. To compensate for insufficient real-time performance measurement, tail hedges need to be evaluated on the basis of scenario analysis.
2012-05-01 Wind Shear Avoidance: Why There Is Value in Momentum by Vineer Bhansali of PIMCO
Explicit tail hedges that look expensive in a normal world may indeed turn out to be cheap if the unimodal morphs into the bimodal.
When faced with bimodal outcomes, momentum as a risk factor becomes potent, and cost-efficient exposure to momentum becomes critical to proper portfolio construction.
In this world of low, pegged interest rates, an investor who is going to take risk needs other means to make the portfolio more inured to unforeseen shocks and market storms. Investors should look at effective alternative beta strategies, such as momentum, that can be implemented efficiently.
2012-03-05 Beyond Risk-on/Risk-off: Paying Heed to Peripheral Cues in Portfolio Construction by Vineer Bhansali of PIMCO
The availability of high-frequency information, technological advances in electronic trading and the dominance of government and regulatory policy factors made the world since the crisis of 2008 a risk-on/risk-off environment. In January 2012, S&P 500 implied correlations began to fall. It appears that stocks are beginning to take a bit more of their individuality back so that other assets dont move in lock step. Investors may benefit from a focus on policymakers, relative value opportunities, hedging potential left tail events, and diversification.
2011-12-13 Asset Allocation and Risk Management in a Bimodal World by Vineer Bhansali of PIMCO
Fat tails and negative skewness in the distribution curve can arise from the mere possibility of multiple equilibriaeven if both individually appear normal. Once markets arrive at a resting place among different equilibria, they tend to become trapped due to a variety of restraining forces. For all these reasons, we believe that the core building blocks of asset allocation and option pricing in the current macroeconomic environment should allow for the possibility of multimodality. This significantly changes the conceptual approach towards portfolio construction and risk management.
2011-08-10 Cash vs. Tail Risk Hedging: Which Is Better? by Vineer Bhansali of PIMCO
PIMCO has done much research over the last eight years of managing so-called tail risk for our clients, and weve come to the conclusion that flexibility and the use of all tools are paramount. The main difference between cash as a hedge against systemic risk and, say, put options is that a dollar of cash remains a dollar of cash regardless of the market, but option values change as either the underlying asset moves down or as the perception of risk changes. In short, we believe guarding against the tails is best achieved by a mix of approaches rather than blind adherence to one.
