During the COVID-19 pandemic, global markets were in a semi-fainting state. They have sunk together, although they have now recovered quite successfully. However, some players were able to benefit from force majeure and get good profit.
Among the market participants who were the winners, Nassim Taleb, the author of the popular Black Swan book and the head of the Universa hedge fund, stands out. In his book, the businessman focuses on the choice of tactics in difficult periods in the market and defines the concept of "Black Swan". It can be recalled that "black swans" refers to force majeure circumstances that radically change the surrounding reality. They force investors to reconsider their old market strategies. In the current circumstances, N. Taleb refers to the COVID-19 pandemic to such "black swans."
Currently, the author of the "Black Swan" adheres to the hedging tactics of the so-called "tail risks". Unlike most investors who expect a V-shaped recovery of the global economy, the head of Universa does not believe in such a development. He is confident that market participants should hedge the risks of another collapse, which is not far off. According to him, the fears caused by the COVID-19 pandemic will continue to dominate the economy and financial markets for a long time to come. Most consumers are cautious in their spending, and this trend will remain for a long time. The current situation will negatively affect many sectors of the economy and the stock market, the businessman claims.
Analyzing the tactics of hedging "tail risks" proposed by N. Taleb, we turn to the definition of this concept. "Tail risk" is a type of crisis that occurs during the formation of an investment portfolio when there is a high probability that the asset price will deviate by more than three standard points. Such changes occur infrequently, but the impact on investment portfolios and financial markets from these impacts is devastating.
In the formation of a standard investment portfolio, the distribution of income from securities occurs as usual. This distribution mode is called bell-shaped. "Tail risk" on both sides of this "bell" arises in any unusual event or force majeure circumstances (in the current situation, this role is assigned to COVID-19).
Tail risks often go hand in hand with high market volatility. Losses resulting from these crises are usually well above the expected fall in asset prices. Investors can protect themselves from the unpredictable and often negative dynamics of the "tail" of the financial "bell" by holding assets whose value increases as markets fall.
It should be noted that N. Taleb not only recommends hedging of "tail risks" to other players, but he himself successfully tested it in practice. During the pandemic and widespread panic in the markets, the Universa hedge fund, managed by N. Taleb received a fantastic profit of 4,000%. During the general collapse, the author was able to earn these impressive 4000% just by hedging the "tail risks".
Despite the efforts of world central banks and primarily the US Federal Reserve, the "flooding" of the economy with money will not continue indefinitely. Taleb said that the current system may fail. According to the author of the Black Swan, the Fed has spent almost all of its existing tools, reducing rates to zero. The result of the current monetary policy may be another collapse of financial markets. In the case of the implementation of such a scenario, hedging the "tail risks" is the best way out of this situation. He summarized that a hedge against tail risk is aimed at increasing the yield of securities in the long term.
