Quick background: Nassim Taleb believes in the need to hedge against "tail risk" or "black swans" -- you don't just invest in the index, but also carry some kind of insurance against sharp declines. He's an advisor at a hedge fund that uses this strategy, where they carry a small amount of insurance. Compared to standard 60/40 allocation, this allows them to carry a higher stock allocation and experience greater returns in good times. When the occasional crashes, their insurance pays off big time, boosting returns. This is described well in this video from Universa, where Taleb is scientific advisor:
https://www.youtube.com/watch?v=9mfnSM0k9jY
Then I ran into something interesting, that in 2012, this same hedge fund partnered with Horizons to introduce a Horizons Universa Canadian Black Swan ETF (HUT). The ETF was terminated in 2016, and I'd like to know why, but I'm assuming it's because they performed poorly and had insufficient assets under management to make it viable. If you look at the TSX chart, this ETF was introduced right at a market bottom right before a +50% index rally. Ha! The insurance + high MER + high TER probably caused a tremendous drag and people asked, why would I bother holding insurance and killing my returns?
In an old thread here at CMF, humble_pie theorized that the ETF will be a loser because Horizons doesn't do well at options trading. Personally, I wouldn't invest in a hedge fund that promises to do this either. Hedge funds have very high fees, and who knows how well they can implement a strategy.
In any case, I think Taleb and Universa's point is still valid: it can be a good idea to hedge or insure a portfolio against declines. And it's probably better to think about this with the market at all time highs, because insurance is so cheap (nobody sees the need for it). But obviously, it's tough to implement, as evidenced by HUT's failure.
Question for all: what methods do you use, or are you considering, for this kind of insurance or black swan protection?
https://www.youtube.com/watch?v=9mfnSM0k9jY
Then I ran into something interesting, that in 2012, this same hedge fund partnered with Horizons to introduce a Horizons Universa Canadian Black Swan ETF (HUT). The ETF was terminated in 2016, and I'd like to know why, but I'm assuming it's because they performed poorly and had insufficient assets under management to make it viable. If you look at the TSX chart, this ETF was introduced right at a market bottom right before a +50% index rally. Ha! The insurance + high MER + high TER probably caused a tremendous drag and people asked, why would I bother holding insurance and killing my returns?
In an old thread here at CMF, humble_pie theorized that the ETF will be a loser because Horizons doesn't do well at options trading. Personally, I wouldn't invest in a hedge fund that promises to do this either. Hedge funds have very high fees, and who knows how well they can implement a strategy.
In any case, I think Taleb and Universa's point is still valid: it can be a good idea to hedge or insure a portfolio against declines. And it's probably better to think about this with the market at all time highs, because insurance is so cheap (nobody sees the need for it). But obviously, it's tough to implement, as evidenced by HUT's failure.
Question for all: what methods do you use, or are you considering, for this kind of insurance or black swan protection?