More Black Swan Funds?

Apparently yesterday’s post came in the middle of this week’s blogosphere hot topic; Black Swan Funds/disaster strategies. New York Times Deal Book had a lengthy write up on the subject yesterday. Generally I am not a fan of extreme portfolios. My willingness to take defensive action is not, I don’t think, a bet on an extreme outcome with a low probability. Aside from the cliche about betting on the end of the world can only payoff once I think the returns from various foreign markets over the last ten years tells us that something akin to “regular” portfolio construction still works. The ideas like 90% t-bills/go berserk with the rest are interesting on some level but not necessarily practical. For whatever one of these black swan funds might cost, someone with enough motivation could probably come up with something on their own for much less money. While anyone who actually wants to do this should remember Montier’s advice that you have to decide which tail you are trying to protect against I think a do it yourselfer would probably want a healthy dose of TIPs exposure. 2008 was rough on the ETFs in this space but I don’t think the panic from back then is likely happen again. But even so I would suggest going shorter in maturity and now there are a couple of ETFs that offer short dated TIPS exposure include the iShares Barclays 0-5 TIPS Bond Fund (STIP). The foreign TIP space is also intriguing, the new iShares International Inflation Linked Bond Fund (ITIP) could be interesting. If not foreign TIPS then some other foreign exposure...

More Black Swan Funds?

Apparently yesterday’s post came in the middle of this week’s blogosphere hot topic; Black Swan Funds/disaster strategies. New York Times Deal Book had a lengthy write up on the subject yesterday. Generally I am not a fan of extreme portfolios. My willingness to take defensive action is not, I don’t think, a bet on an extreme outcome with a low probability. Aside from the cliche about betting on the end of the world can only payoff once I think the returns from various foreign markets over the last ten years tells us that something akin to “regular” portfolio construction still works. The ideas like 90% t-bills/go berserk with the rest are interesting on some level but not necessarily practical. For whatever one of these black swan funds might cost, someone with enough motivation could probably come up with something on their own for much less money. While anyone who actually wants to do this should remember Montier’s advice that you have to decide which tail you are trying to protect against I think a do it yourselfer would probably want a healthy dose of TIPs exposure. 2008 was rough on the ETFs in this space but I don’t think the panic from back then is likely happen again. But even so I would suggest going shorter in maturity and now there are a couple of ETFs that offer short dated TIPS exposure include the iShares Barclays 0-5 TIPS Bond Fund (STIP). The foreign TIP space is also intriguing, the new iShares International Inflation Linked Bond Fund (ITIP) could be interesting. If not foreign TIPS then some other foreign exposure...

What About Cash?

James Montier (hat tip Cullen Roche) has a paper out on tail risk with some ideas on how to protect against it and a bit of a warning about the saturation of products now at investors’ disposal. While not necessarily the focus of my post I would point out that Montier rightfully places a lot of importance making sure you know what tail risk you are hedging against. For example, if your primary concern is hyperinflation then you don’t want to load up on TLT or a bunch of long bonds. I like that Montier is skeptical about all the “tail risk” products, even the fund that Nassim Taleb advises may come out with a black swan ETF. I generally believe in trying to protect portfolios against large declines in the market. In the past this has included cash (raised from selling some positions), inverse index funds and market neutral/absolute return funds. Where the market neutral/absolute return funds are concerned I have sought out what I believe to be relatively simple products. Montier points out the utility of cash in this context. In terms of incorrect positioning too much long exposure is worse than too much cash. People often get impatient holding cash although I think they become more accepting when they see the market endure a large decline while they have a large cash position. It would be great to be correct with every decision, all in or all out. As this is not possible the question becomes what is possible or reasonable? Obviously heeding something like a breach of the 200 DMA requires no ability to correctly...

What About Cash?

James Montier (hat tip Cullen Roche) has a paper out on tail risk with some ideas on how to protect against it and a bit of a warning about the saturation of products now at investors’ disposal. While not necessarily the focus of my post I would point out that Montier rightfully places a lot of importance making sure you know what tail risk you are hedging against. For example, if your primary concern is hyperinflation then you don’t want to load up on TLT or a bunch of long bonds. I like that Montier is skeptical about all the “tail risk” products, even the fund that Nassim Taleb advises may come out with a black swan ETF. I generally believe in trying to protect portfolios against large declines in the market. In the past this has included cash (raised from selling some positions), inverse index funds and market neutral/absolute return funds. Where the market neutral/absolute return funds are concerned I have sought out what I believe to be relatively simple products. Montier points out the utility of cash in this context. In terms of incorrect positioning too much long exposure is worse than too much cash. People often get impatient holding cash although I think they become more accepting when they see the market endure a large decline while they have a large cash position. It would be great to be correct with every decision, all in or all out. As this is not possible the question becomes what is possible or reasonable? Obviously heeding something like a breach of the 200 DMA requires no ability to correctly...

ETPs Should Be Scrutinized

Michael Santoli took a couple of shots at the ETF industry this weekend referring to fund providers as being opportunistic and making some fun of the many ETPs that track the VIX index one way or another. Opportunistic may or may not be the best word but in general the investment product industry is trying to make money. There is potentially an adversarial relationship between the end user the the product company. I’m not sure it is correct to think of this as good or bad because either way the companies are trying to make money and either way there is the potential adversarial relationship. The more important thing is knowing these things. There is nothing wrong with coming at the use of investment products with a skeptical eye. For someone who invests from the top down, part of the process is choosing the best way in. Sticking with the VIX, maybe after sifting through the ETPs the option contracts on VIX would actually be better? The ETPs have a lot of moving parts–they are far from plain vanilla but I don’t think anything track VIX can be plain vanilla. I don’t think any of the ETPs are created with the intent to deceive or otherwise harm investors but that does not mean that some levered product tracking an index that is often oversimplified an poorly understood will work, often these things don’t work as investors hope. This is often about investors not actually understanding the product as anything else but that does not change the fact that we are talking about a product issued by a company looking...