Following the Crash and Nassim Taleb, Firms Start to Offer Black Swan Protection

PIMCO is the latest vendor with plans to offer protection against violent market swings following the 2008 collapse and warnings by commentators such as Nassim Taleb of “Black Swan” fame.

(July 21, 2010) — Following the crash of 2008 and the rise to prominence of commentators such as Nassim Taleb, financial firms are increasingly looking to market products aimed at helping firms protect against ‘Black Swan’ events.

According to reports, Pacific Investment Management Co. (PIMCO) – the giant west-coast fixed-income specialist – is planning on offering investors a product that would protect against a 15% drop in market value. Deutsche Bank and Citigroup also offer products that provide hedging against “tail risk” events, now more commonly known as “Black Swans” after the rise to prominence of finance author Nassim Taleb.

“How should institutional investors invest?,” Taleb asked ai5000 earlier this year. “Exactly my barbell idea in which one keeps high cash reserves while taking aggressive risks but with a small portion of the portfolio.” However, Taleb has expressed a belief that few funds will be able to stick with such a strategy and the products used within it. “They will drop like flies,” Taleb is quoted by Bloomberg as saying. “They and their customers will give up at some point. I’ve seen it before.”

Regardless of investor staying power, the logic behind such products is commonly accepted. “Everyone is starting to realize that this is going to be a much longer, much more difficult path to recovery,” says State Street’s William Cunningham, according to Bloomberg. “It’s really quite fragile and vulnerable in a way that we haven’t seen in our lifetime.” At least some investors, including the Indiana state public pension fund, have expressed interest in such products.

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For ai5000’s exclusive video series with Nassim Taleb, click here.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

In a a Keefe, Bruyette & Woods survey of chief investment officers overseeing US institutional portfolios, investors are showing a growing interest in “barbell” allocations to indexed equities and high-alpha alternatives.

(July 20, 2010) — According to a survey, chief investment officers overseeing US institutional portfolios are increasingly attracted to indexed equities and high-alpha alternatives, with BlackRock, Blackstone Group and Och-Ziff Capital Management “particularly well positioned” to benefit from those trends.

Goldman Sachs, Morgan Stanley, and JPMorgan Chase also received high marks from survey respondents when asked to rank the alternative managers they’d be most willing to commit additional capital toward.

The survey, conducted by Keefe, Bruyette & Woods, revealed that the pull toward “barbell” allocations will come at the expense of active long-only domestic equity strategies. Less than 60% of the 51 CIOs surveyed in May expect to lower their allocations to active long-only equities over the coming three years. More than 30% predict “no change” and less than 10% expected to up allocations.

Meanwhile, the survey found that the trend to passive strategies may be somewhat less than what many observers perceive, yet it remains generally positive. Respondents to the survey generally expect to increase their allocations to passive, alternative, and fixed income strategies – flows into passive equity strategies are expected to increase, with 37% of respondents predicting either a modest or significant increase and 19% expecting a decrease.

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According to the research, alternative strategies in particular seem poised to generate new flows. More than 50% of respondents expect to increase their allocations to hedge fund strategies, while 40% of respondents expect allocations to private equity and/or real estate to increase.

KBW’s Chief Investment Officer (CIO) Survey included responses from CIOs and key decision makers at corporate and government pension plans, endowments, foundations, and investment managers.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742