Tags: Investors | Money | Black | Swan | Funds

FT: Investors Moving Money Into ‘Black Swan’ Funds

Tuesday, 04 Oct 2011 01:31 PM

By Michelle Smith

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Investors are clearly spooked by the potential effects of the European debt crisis and suggestions of another recession. The Financial Times reports that a growing number are funneling more assets to hedge funds that protect them against extreme events, also known as "Black Swans."

In particular, investors are seeking out tail-risk funds. These typically bet on dramatic moves in prices and seek to minimize their losses during times of rising or stable prices, says the Financial Times. The report notes that those run by Bennelong Asset Management, 36 South and Saba are examples of funds attracting such interest.

Tail funds derive their name from the outlying points, or tails, on bell-shaped curves that forecasters use to plot the probability of losses or gains in a given market, explains a Bloomberg article.

They are also called "Black Swan" funds. This, Bloomberg explains, is because hedging against improbable events was pioneered in the 1980s by traders including Nassim Nicholas Taleb, whose book, “The Black Swan,” warned that bankers relying too much on probability models had become blind to potential catastrophes.

These funds have seen inflows at the same time that other hedges typically used by traders, such as exchange-traded products that track the CBOE Volatility Index, or Vix, have seen sharp rises in price, the Financial Times reports.

Investment in these black swan funds is also occurring at a time when hedge funds are generally not earning too many bragging rights.

Bloomberg reported that hedge funds globally declined 4.8 percent in the seven weeks ended Sept. 12, according to a Hedge Fund Research Inc. index.

Tail-risk funds, on the contrary, appear to be bucking that trend of losses and soaring.

Bloomberg reported that Saba Capital Management LP’s $550 million tail risk fund gained 11.5 percent in September after increasing 15 percent in August and Pine River Capital Management LP’s $160 million tail fund advanced 14.5 percent in August.

But, before jumping into such a fund, investors may want to give the move some thought.

Aaron Yeary, portfolio manager of Pine River’s multi-strategy fund, warned that investors should avoid taking unusual risks in their attempts to hedge. “If you are getting esoteric with your hedges, those may not be very good hedges at all,” he told the Financial Times.

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