Portfolio Risk and Performance

Chasing Your Own Tail (Risk), Revisited

November 19, 2019 - Ashwin Thapar Daniel Tremblay

Topics - Portfolio Risk and Performance Alternative Investing

One of the most important topics on investors’ minds following the Global Financial Crisis was how to protect their portfolios from the next crisis. Our paper “Chasing Your Own Tail (Risk)” was our response. In it, we argued that for most investors, direct ways of protecting a portfolio — through the purchase of options — were too costly; instead, we presented five ideas that we thought would serve long-term investors better.

Since then, traditional 60/40 portfolios have had above-average returns and much lower-than-average risk. Thus, any strategy designed to mitigate risk has recently faced at least two headwinds: few risks to protect against, and a high-performance hurdle to warrant its inclusion in a portfolio. But today, perhaps in part due to high stock and bond market valuations, the length of the post-GFC bull run, or fears of where we are in the business cycle, investors have once again turned to addressing the risk of a severely declining market.

With that backdrop, and with eight years behind us, we evaluate how our original recommendations held up. Below we summarize these five approaches to building a more resilient portfolio.

Defensive Equity, Risk Parity, Managed Futures
Related Thinking

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Diversification does not eliminate the risk of experiencing investment loss.
 
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