Cash is Better Than Fat Tails Insurance, Part 2

In Part 1, we learned why cash is not trash. And now, we have confirmation that tail risk protection is probably yet another fad. Actually, it’s a brilliant way to collect fees while losing money.

New Investment Strategy: Preparing for End Times
Boaz Weinstein, a former trader at Deutsche Bank who lost more than $1 billion of the bank’s money during the financial crisis, began raising money for his own Armageddon fund late last year. It has since grown to $400 million of mostly institutional money, part of the $3.3 billion he has raised for his hedge funds.
“Some investors after nursing those losses say, ‘I’d be much happier in return for not having that kind of downside to reinvest 1 percent of my portfolio in tail hedging,’ ” he said.

Even more interesting is a paragraph early in the article alluding to “di-worse-sification”:

Investors learned about tail risk the hard way. For decades, diversification — spreading holdings across stocks, bonds and other investments — was promoted as the way to protect investments from market crashes. But the financial crisis proved that seemingly unrelated assets could fall in unison. As a result, an increasing number of investors now want protection for financial end times.
. . .
“In the last decade, we saw two stock market crashes, which wiped out any gains for investors over the decade and meant disaster for those who had to take their money out to meet big expenses at market lows,” said Zvi Bodie, a professor of finance at Boston University School of Management. That, he said, “has just made the current generation of investors more aware that it is risky even over a decade or more.”

This mantra is being used as a sales too, much like the lore of stock picking, and reflects a total lack of insight into the problem (and the true solution): Diversify Against Volatility, Hedge Against Market Risk.
Oh well, somebody has to be on the other side of our trades. 😉