New tail risk ETF

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ochotona
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New tail risk ETF

Post by ochotona » Sat Apr 08, 2017 9:36 pm

"The Cambria Tail Risk ETF seeks to mitigate significant downside market risk. The Fund intends to invest in a portfolio of “out of the money” put options purchased on the U.S. stock market. TAIL strategy offers the potential advantage of buying more puts when volatility is low and fewer puts when volatility is high. While a portion of the fund’s assets will be invested in the basket of long put option premiums, the majority of fund assets will be invested in intermediate term US Treasuries. As the fund is designed to be a hedge against market declines and rising volatility, Cambria expects the fund to produce negative returns in the most years with rising markets or declining volatility."

http://cambriafunds.com/tail.aspx

Sounds like an interesting fund for the trendfollower, and loads safer than buying a short ETF like SH.
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Mark Leavy
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Re: New tail risk ETF

Post by Mark Leavy » Sat Apr 08, 2017 11:18 pm

A) Never invest in anything you don't understand.

B) If you understood that paragraph then you know enough to manage tailrisk much more efficiently than described.
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Re: New tail risk ETF

Post by Mark Leavy » Sat Apr 08, 2017 11:51 pm

Tailrisk

It’s late and I have some time. I don’t think I’ve run into too many layman’s definitions of tailrisk. I’ll give it my spin.

Most financial risk assumptions assume a Gaussian distribution of returns - just to make the math easier.

That implies that the impact of unlikely events (events that occur at the tails of a Gaussian Distribution) will happen infrequently enough that the average losses will be minimal.

This assumes an investing strategy that bets on returns closer to the normal of the distribution.

Tail risk management strategies acknowledge that the distribution of returns is not Gaussian (duh!) and that in fact more returns fall outside the norm than would be predicted with a simplistic Gaussian (Black-Scholes) model. They then take the inverse position (using options) to “hedge” your other investments.

Yea... that worked a long time ago when Nassim Taleb and Claude Shannon and Edward Thorp all figured that out. Those days are long gone.

Now options are priced on market knowledge that goes far beyond naive models. The actual prices are then back propagated to give us our simplistic VIX numbers.

You will never beat fat tails by using Black-Scholes or going plus or minus on options. Smarter people already have you beat.

The only way to win is not to play.

The implicit risk of fat tails implies that you are investing in a strategy that provides frequent small (limited) returns with an occasional large loss. (picking up pennies in front of a steam roller)

The opposite bet is to invest in a strategy with frequent small (limited) losses with an occasional large return. Taleb (the seer of “fat tails”) describes this investment strategy as ‘anti-fragile - and the only approach that make sense throughout history.

Today’s options markets are now efficient enough that you will never get asymmetric returns (limited downside, unlimited upside) from a pure options play.

Surprisingly, the Permanent Portfolio does a pretty reasonable job. It fit’s Taleb’s definition of “Anti-Fragile”.
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Re: New tail risk ETF

Post by dualstow » Sun Apr 09, 2017 12:00 am

Oh, that meb faber.
---
Great explanation, Mark, and with a Wargames reference!
(Or maybe it predates Wargames. I don't know).
RIP Toots
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Re: New tail risk ETF

Post by sophie » Sun Apr 09, 2017 7:12 am

ochotona wrote:"The Cambria Tail Risk ETF seeks to mitigate significant downside market risk. The Fund intends to invest in a portfolio of “out of the money” put options purchased on the U.S. stock market. TAIL strategy offers the potential advantage of buying more puts when volatility is low and fewer puts when volatility is high. While a portion of the fund’s assets will be invested in the basket of long put option premiums, the majority of fund assets will be invested in intermediate term US Treasuries. As the fund is designed to be a hedge against market declines and rising volatility, Cambria expects the fund to produce negative returns in the most years with rising markets or declining volatility."

http://cambriafunds.com/tail.aspx

Sounds like an interesting fund for the trendfollower, and loads safer than buying a short ETF like SH.
"Safe? This is obviously some strange usage of the word 'safe' that I wasn't previously aware of."

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ochotona
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Re: New tail risk ETF

Post by ochotona » Sun Apr 09, 2017 7:45 am

Saf-er than shorting a bear market. Not safe like a Treasury bond!

As with all new ETFs... you watch, and don't buy. I will like to see how it does relative to simpler hedges like US Treasuries during the next bear market.
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Re: New tail risk ETF

Post by Kbg » Sun Apr 09, 2017 8:30 am

My guess is it will outperform or it wouldn't make sense to buy it in the first place and I'm sure Meb has probably looked at that. The question is how will it do vs. LTTs for a full market cycle in terms of downside protection vs. cost of insurance?
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ochotona
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Re: New tail risk ETF

Post by ochotona » Sun Apr 09, 2017 8:39 am

Kbg wrote:My guess is it will outperform or it wouldn't make sense to buy it in the first place and I'm sure Meb has probably looked at that. The question is how will it do vs. LTTs for a full market cycle in terms of downside protection vs. cost of insurance?
LTTs do OK, but I found ITT do better. This ETF is right now at the start positioned at 91% ITT, so it's a very spendy way (expense 0.69%) to buy Treasuries, with a 9% slice of options.

The test for me is on the next severe correction or bear market where trend-following cycles me into and back out of bonds, $TAIL has to do much better than $IEF, or else why bother? But at least you've only possibly thrown away the cost of the options. He probably chose 90% bonds 10% options to use the bond interest to buy the options.
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Re: New tail risk ETF

Post by Kbg » Sun Apr 09, 2017 9:35 am

He's talked about this in general on his podcast and I think his words paraphrased will do...it's insurance and it will cost you.
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Re: New tail risk ETF

Post by dualstow » Sun Apr 09, 2017 9:52 am

I think I'd rather just buy my own put options if I were into that.
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Re: New tail risk ETF

Post by Desert » Sun Apr 09, 2017 12:27 pm

Mark Leavy wrote: The implicit risk of fat tails implies that you are investing in a strategy that provides frequent small (limited) returns with an occasional large loss. (picking up pennies in front of a steam roller)

The opposite bet is to invest in a strategy with frequent small (limited) losses with an occasional large return. Taleb (the seer of “fat tails”) describes this investment strategy as ‘anti-fragile - and the only approach that make sense throughout history.

Today’s options markets are now efficient enough that you will never get asymmetric returns (limited downside, unlimited upside) from a pure options play.

Surprisingly, the Permanent Portfolio does a pretty reasonable job. It fit’s Taleb’s definition of “Anti-Fragile”.
Nice explanation, Mark. Swedroe's "minimize fat tails portfolio" obviously has the same objective. A relatively small slice of high-risk equity, combined with a large allocation to safe assets. 60/40 returns without the big fat tails.
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Re: New tail risk ETF

Post by clacy » Wed Apr 12, 2017 3:57 pm

Meb Faber seems like a pretty interesting guy, but his track record with launching ETF's is laughable.

He keeps trying though I guess.
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