Hedge funds learn the art of protecting portfolios from tail risk

Tail risk events, sometimes depicted as black swans, are more prevalent than first thought and certainly more painful. Hedge funds managers are finding ways to protect portfolios against such events.

When explaining complex hedge fund strategies, one might not immediately think of former US Defence Secretary Donald Rumsfeld. He neatly described the concept behind the increasingly prevalent strategy when he coined the phrase “unknown unknowns”.

These are, said Rumsfeld in 2002, “things we don’t know that we don’t know”.

For hedge fund managers that encapsulates tail risk events: phenomena to which most of the financial industry is oblivious but which are immensely painful when they unexpectedly