Wednesday, June 29, 2011

"A New Investment Strategy: Preparing for End Times"

This is not new.
Here at Climateer world headquarters

Associated Press
HT on the pic: an old MarketBeat post.

we have been  on the doom-beat for years although we don't link to Rosenberg or Roubini very much.*
In fact, seeing their names together (R,R) always reminds me of The Simpsons, episode 7GO2, Bart the Genius:
Teacher:  So y = r cubed over 3. And if you determine the rate of change in this curve correctly, I think you'll be pleasantly surprised.
[The class laughs except for Bart who appears confused.]
Teacher:  Don't you get it, Bart? Derivative dy = 3 r squared dr over 3, or r squared dr, or r dr r.
[you have lost your mind -ed]

I'm also reminded of "Portfolio Insurance" ca. 1987.
From DealBook:
Investment professionals have a new pitch: The sky could soon be falling.

While Greece took a step back from the brink on Wednesday, the possibility of a default remains a fear. Europe’s debt crisis, as well as natural disasters and political uprisings, are prompting investors both big and small to seek out investments that promise to protect their portfolios in the event of economic Armageddon.
Worried that Greece could go belly up? So-called black swan funds — named for rare and unexpected events — offer a way to profit in the event of a market collapse. Think a slowdown in the United States or China could set off a global economic crisis? New exchange-traded funds are popping up to help pad investor confidence.

Since the financial crisis, many investors have prospered from a rebound in the markets. But recent events have led some to brace for the worst.

“Clients are suddenly realizing the world isn’t as rosy as it’s been,” said Ahmed Fattouh, a hedge fund executive. “It makes a lot of sense to have these tail protections on.”

That is, protections against what Wall Street calls “tail risk” — a disaster that is estimated to have less than half a percent chance of happening.

Investors learned about tail risk the hard way. For decades, diversification — spreading holdings across stocks, bonds and other investments — was promoted as the way to protect investments from market crashes. But the financial crisis proved that seemingly unrelated assets could fall in unison. As a result, an increasing number of investors now want protection for financial end times.

These funds and offerings, usually costly and complicated, can be likened to insurance. Investors lose money on them during normal times, but they stand to gain if catastrophe strikes.

Tens of billions of dollars are in such investments, representing a small but growing fraction of the investment word, particularly for a strategy that many investors would have scoffed at five years ago as expensive and unnecessary.

“In the last decade, we saw two stock market crashes, which wiped out any gains for investors over the decade and meant disaster for those who had to take their money out to meet big expenses at market lows,” said Zvi Bodie, a professor of finance at Boston University School of Management. That, he said, “has just made the current generation of investors more aware that it is risky even over a decade or more.”.

Wall Street lawyers say money manager clients have approached them in recent months about forming new funds aimed at providing protection. Banks like Goldman Sachs are marketing tools engineered to bulletproof investors. Products linked to an index known as the market’s “fear gauge” total nearly $2.5 billion. And in the last year, the amount of money managed in dedicated tail-risk accounts by the bond giant Pimco has doubled to $23 billion...MORE
We are fans of Professor Bodie, here are some mentions:
Stocks, Bonds, Pensions and Guarantees
"Turmoil May Make Americans Savers, Worsening `Nasty' Recession"......... Keynes Stops By. And What's up with TIPS Pricing?
"Berkshire May Be Required To Post Up To $8 Billion In Collateral" (BRK.A; BRK.B)

*When dancing the Apocalypto, the AA boys, Ambrose and Albert have much better rhythm.