FINANCIAL ADVISOR INSIGHTS: Tail Risk Hedging Is Crucial In Portfolio Construction

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Tail Hedging Is An Important Part Of Portfolio Construction (Advisor Perspectives)

Quiet markets characterized by low volatility and no clear risks make investors complacent and can often cause them to take on dangerous, leveraged positions. Eventually, deleveraging and losses follow in this cycle, which often leads to a typical behavior pattern.

"When the markets experience large losses, tail risk hedging comes back into fashion, leading to an old-fashioned surge in demand that drives up volatilities across markets. This in turn reduces the overall effectiveness of naïve hedges, and means one has to be smart about when and where to spend hedging premiums.

"On the other hand, when markets are quiet, investors can quickly forget the pain suffered during prior crises, and may choose to eliminate the cost of tail hedging, or even more dangerously become sellers of tail hedges. …Tail hedging is not just a trade, but an asset allocation decision for robust portfolio construction."

2013 Will Be The Year Of The "Great Rotation" (BoFA's Hartnett)

BofA Merrill Lynch's Chief Investment Strategist Michael Hartnett says money will move from bonds to equities.  In fact he said it's already begun.

Even though the public data doesn't reflect investors moving from bonds and into stocks just yet, Hartnett says BofA's data on client positioning does:

"The past seven years have seen a Great Divergence in terms of fund flows. Investors have poured $800bn into bond funds and redeemed $600bn from long-only equity funds. But recent data show the first genuine signs of equity-belief in years. The past 13 days have seen $35 billion come back into equity funds ($19 billion of which is via long-only)."

Ray Dalio Thinks 2013 Will Be A Transition Year (CNBC)

In an interview with CNBC, Ray Dalio, founder of Bridgewater Associates said 2013 is likely to be a transition year where large amounts of cash will move to stock and all sorts of stuff – goods, services, and financial assets. Dalio said people will spend more with the cash, they will invest in equities and gold – the cash will move.

Low Cost Funds Geared Around Alternative Indexes Are Getting A Lot Of Attention For Investors  (The Wall St. Journal)

At a time when yields are low and inflation risk is looming, bond investors can find an "unlikely ally" in alternative bond funds that don't just track market-cap sized indexes.

"These funds are geared around alternative indexes that forsake market-capitalization sizes to rank bond issuers, and advisers say they are starting to get more attention from affluent investors concerned about inflation rising sooner rather than later."

The Only Limitation The U.S. Faces Is Political, Not Economic, Not Fiscal (The New Republic)

In an interview with Liaqat Ahamed at The New Republic, outgoing Treasury Secretary Tim Geithner said a lot more can be done with fiscal policy, especially if it is accompanied by a "credible long-term plan to bring down deficits".

"I think that the best economic strategy for the country would be to combine a set of very powerful near-term investments in infrastructure and elsewhere that would help support demand with long-term fiscal reforms that would restore sustainability. I think the limits we face right now are only political, not economic, not fiscal."



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