Sunday, April 9, 2017

This ETF Helps Investors Hedge Market Risks

In previous two posts we discussed the benefits of using tail-risk hedge funds to dampen portfolio volatility:

Recently Max Chen reported that Cambria Investments is rolling out a tail-risk protection ETF:

TAIL tries to provide income and capital appreciation from investments in the U.S. markets while protecting against downside risk, according to a prospectus sheet.
The active ETF will invest in cash and US. government bonds, and utilizing a put option strategy to manage the risk of a significant negative movement in the value of domestic equities, or more commonly known as tail risk, over rolling one-month periods.

While we don’t fully understand the last paragraph:

Additionally, since the put options generate premiums or income, TAIL investors may also have access to an alternative yield-generating asset. Many investors are stretching for yield and taking on risk in a low-interest-rate environment, and this tail risk strategy may provide a good alternative.

i.e. why the ETF buys out of the money put options, and these options can generate income at the same time, we agree that there is a need for funds that protect investors in a market downturn. To be able to add any value, such a fund should provide the protection in an economical way.

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