The concept of managing tail risk as part of investors’ overall risk-management objectives is not new, but it has gained a considerable profile as a result of the major tail risk events that characterised the 2008-09 global financial crisis and subsequent market volatility. Both recent history and uncertainty about the future are reflected in changing attitudes to mitigating the impact of tail risk events, including raising levels of protection and reassessing the products and strategies used to protect portfolios.
In order to determine how changing perceptions of tail risk have affected the investment strategies of institutional investors, the Economist Intelligence Unit, on behalf of State Street Global Advisors, conducted a survey of over 300 investors from the US and Europe, including institutions, pension funds, family offices, consultants, asset managers, private banks and insurance funds.
Key findings of the survey include:
Tail risk events are always underestimated
The next tail risk event is expected imminently, stemming from Europe
The benefits of diversification are not clear—but most investors continue to diversify
Investors weigh both effectiveness and value when choosing strategies
Investors are not entirely confident that they are protected from the next tail risk event