How do tail risk hedging strategies fit into an asset allocation solution?
Brittain: Tail risk hedges – portfolios of option-like securities that have asymmetric payoff patterns – may complement asset allocation strategies. To hedge against risk in the traditional asset allocation approach, an investor might consider selling risky assets (buying less risky assets and moving off the efficient frontier), buying momentum strategies and buying flight-to-quality assets, like short-dated Treasury securities. As a complement to these strategies, an investor might consider buying a portfolio of option-like securities and maintaining exposure to risk assets at a higher level. Investors gravitate to these strategies because they are designed to provide liquidity during periods of crisis and allow the investor to play offense, buying risk assets when their prices are down. At PIMCO, we construct these portfolios of option-like instruments by using the deep and liquid options markets. In building these portfolios, we take account of investor hedging budgets, the specific