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Total Posts: 34
Joined: Feb 2019
Posted: 2019-03-31 15:13

First of all, I'd like to point out that I really have no experience in the field, but I am interested and have been thinking about this for a short while. Usually, the standard benchmark risk measure that most funds report is the sharpe. After listening to and reading Nassim Taleb, I thought his reasoning about "real" risk seemed quite on point. I gathered that he means you should only concern yourself with catastrophic loss, and pay no mind to the volatility that comes intrinsically with the risk taking.

Consider a portfolio manager that pays no attention to downwards volatility within a certain interval and hedges all downside risk outside of that interval, for example all risk starting from 60-70% of the portfolio value is hedged (or less depending on what is reasonable), and the portfolio is allowed to freely vary within that interval. I see two potentially large issues, the cost of the hedge which I guess could be huge, and explaining the idea to investors. Except for these issues: do you believe that such a strategy would allow for long-term outsized returns compared to the steady returns-approach most funds seem to aim for today? Are there such strategies in play today?

Also, do you believe Taleb's reasoning has merit at all, even if the hedging strategy might be stupid?

Nous promettons selon nos espérances, et nous tenons selon nos craintes.


Total Posts: 188
Joined: Jul 2013
Posted: 2019-04-03 21:44
I read Taleb a long time ago, I dont remember this bit but I didnt get that much into that book (maybe you are talking about another one).
You should explain your strategy better for us to guide you and you wont find straight answers here.
What I can tell you is that hedging the extreme events with options is borderline stupid, mainly because you can achieve better results with risk management (resizing you position based on your risk forecasts) or to the extreme stop loss (which should really be a control system).

Taleb's reasoning from what I have seen is something we all knew about, just maybe structurers and in general mathematicians/engineers ported to finance from elsewhere did not know these concepts or did not expect what happened then (I had conversations with risk managers at large banks with a fairly narrow minded mentality).
He published at the right time these concepts so good for him and well deserved success.

I hope it helps...

"amicus Plato sed magis amica Veritas"
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