Tail Risk Hedging: Creating Robust Portfolios for Volatile Markets - Hardcover

by Vineer Bhansali (Author)

"TAIL RISKS" originate from the failure of mean reversion and the idealized bell curve of asset returns, which assumes that highly probable outcomes occur near the center of the curve and that unlikely occurrences, good and bad, happen rarely, if at all, at either "tail" of the curve. Ever since the global financial crisis, protecting investments against these severe tail events has become a priority for investors and money managers, but it is something Vineer Bhansali and his team at PIMCO have been doing for over a decade. In one of the first comprehensive and rigorous books ever written on tail risk hedging, he lays out a systematic approach to protecting portfolios from, and potentially benefiting from, rare yet severe market outcomes.

Tail Risk Hedging is built on the author's practical experience applying macroeconomic forecasting and quantitative modeling techniques across asset markets. Using empirical data and charts, he explains the consequences of diversification failure in tail events and how to manage portfolios when this happens. He provides an easy-to-use, yet rigorous framework for protecting investment portfolios against tail risk and using tail hedging to play offense. Tail Risk Hedging explores how to:

• Generate profits from volatility and illiquidity during tail-risk events in equity and credit markets
• Buy attractively priced tail hedges that add value to a portfolio and quantify basis risk
• Interpret the psychology of investors in option pricing and portfolio construction
• Customize explicit hedges for retirement investments
• Hedge risk factors such as duration risk and inflation risk

Managing tail risk is today's most significant development in risk management, and this thorough guide helps you access every aspect of it. With the time-tested and mathematically rigorous strategies described here, including pieces of computer code, you get access to insights to help mitigate portfolio losses in significant downturns, create explosive liquidity while unhedged participants are forced to sell, and create more aggressive yet tail-risk-focused portfolios. The book also gives you a unique, higher level view of how tail risk is related to investing in alternatives, and of derivatives such as zerocost collars and variance swaps. Volatility and tail risks are here to stay, and so should your clients' wealth when you use Tail Risk Hedging for managing portfolios.

PRAISE FOR TAIL RISK HEDGING:

"Managing, mitigating, and even exploiting the risk of bad times are the most important concerns in investments. Bhansali puts tail risk hedging and tail risk management under a microscope--pricing, implementation, and showing how we can fine-tune our risk exposures, which are all crucial ways in how we can better weather our bad times." -- ANDREW ANG, Ann F. Kaplan Professor of Business at Columbia University

"Bhansali's book demonstrates how tail risk hedging can work, be concretely implemented, and lead to higher returns so that it is possible to have your cake and eat it too! A must read for the savvy investor." -- DIDIER SORNETTE, Professor on the Chair of Entrepreneurial Risks, ETH Zurich

Back Jacket

Investors know that just one severe market shock may be terminal for a financial plan. To retain a portfolio's hard-won value, asset managers need to supplement traditional risk management paradigms with a forward-thinking, "just-in-case" strategy. The answer is Tail Risk Hedging.

No one is better qualified to offer this first authoritative and rigorous coverage of hedging against tail risks than Vineer Bhansali. A master of implementing theory into practice, he shares strategies, frameworks, and formulas for managing portfolios hedged against tail risk. He gives you the tools and the foundations you need to manage your clients' wealth against market disasters, including:

• AN INSIDER'S LOOK AT PIMCO'S RISK FACTOR APPROACH TO FORWARD-LOOKING INVESTMENT DEVELOPMENT AND PORTFOLIO CONSTRUCTION
• UNIQUE INSIGHTS AND FRAMEWORKS NOT BROADLY WRITTEN ABOUT IN THE FIELD OR ACADEMIA
• ANALYSIS OF THE MAJOR BEHAVIORAL PHENOMENA IN THE MARKETS AND THEIR RELEVANCE FOR TAIL HEDGING

Author Biography

VINEER BHANSALI, PH.D., is a managing director and portfolio manager in the Newport Beach office of PIMCO, where he oversees the company's quantitative investment portfolios.