"If you don't have a hedge, I suggest not being on the market because of the enormous uncertainty we face."
This is "Black Swan: The Impact of the Most Unlikely" author Nassim Nicholas Taleb, who outlines his view of the risks in the market and the growing uncertainty about the future in times of a deadly pandemic that has created a public health crisis.
During an interview on CNBC on Friday, the popular author shared the view that investors should be protected against the so-called “tail risk”, which relates to extreme events where the results are unlikely to be distributed. Taleb has spent his career recording tail risk events that are unlikely to occur, but that occur more frequently than one would expect and are therefore often underestimated by the wider investment community.
Taleb said the current market landscape may have increased uncertainty, even though the stock market, in spite of signs of a spreading COVID 19 pandemic, is worsening in places and the forecasts for a "V-shaped" or rapid economic recovery.
"We are printing money like there is no tomorrow," Taleb said, referring to the Federal Reserve's efforts to alleviate the financial problems of the epidemic by providing trillions of impulses to the market. The Fed cut interest rates to a very low range of 0% to 0.25% as early as March, and may not have much room to further alleviate the economic pain of the virus outbreak and other issues that may arise in this crisis.
"And COVID seems to be there, even if the pandemic subsides … you will still have people who are careful enough to affect many industries," he said.
Hedge funds designed to benefit from tail risks have seen a remarkable increase in the age of COVID-19.
For example, the Cboe Eurekahedge Tail Risk Volatility Hedge Fund Index has achieved a return of 48.19% so far this year. To compare the Dow Jones Industrial Average
The S&P 500 Index has fallen by almost 12% by 2020
is down 6.2% and the Nasdaq Composite
has risen by almost 10% so far this year.
Meanwhile, Universa, managed by Mark Spitznagel, had an impressive 4,000% return on its tail risk fund during the pandemic's climax. Taleb was also an advisor in this fund.
Of course, protecting your portfolio from such risks instead of relying on it can be critical. Mutual funds that have tried to put large sums on market turmoil have tended to underperform, writes the Wall Street Journal. This is because these large declines bets have not benefited from subsequent market setbacks.