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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