Market sell-off highlights need for tail risk management strategies

7 February 2018

The market falls of the past few days will have left many investors exposed to significant losses if they don't have a program in place to manage tail risk, says Alastair MacLeod of Wheelhouse Partners.

"A market downturn is inevitable. Whether we are seeing the start of that process now, or just a blip, is yet to be determined – but it will eventually happen".

"Indeed, our research suggests it will happen sooner rather than later. So-called '100-year storms' in fact happen every eight or nine years, so it could be said we are now living on borrowed time since the global financial crisis hit just over 10 years ago.

"It's therefore important for investors – particularly those approaching or in retirement, when sequencing risk becomes so critical – to have in place some kind of tail risk management program to protect themselves from the full impact of market downturns.

"Our approach recognises that, in retirement, the goalposts have moved and the focus should not always be to seek the highest return each and every year.

"Instead, the critical objective should be to reduce the risk of unfavourable outcomes, where a retiree's lifestyle may be affected in some way because they were simply unlucky in the path of returns that were delivered."

Alastair says the Wheelhouse active tail risk program has now engaged, and over the past two days has more than covered the cost of protection since the fund's inception nine months ago.

"This means our investors have been protected from the worst of the market falls over the past few days.

"At the market's low point yesterday, the tail risk program had lowered effective risk in the portfolio to around 57 percent of the market and significantly smoothed the return profile for investors, while at the same time remaining near fully invested and having every dollar pursue equity returns.

"Should the market fall further, this market risk level is expected to decrease, preserving capital more aggressively.

"If we were to enter a period of lower equity returns and increased market volatility, the fund's high income and capital preservation characteristics should be well-placed to add further value," Alastair said.

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