SSgA Report Highlights Continued Concerns About Tail Risk Events Among Institutional Investors
September 27 2012 - 10:30AM
Business Wire
New research commissioned by State Street Global Advisors
(SSgA), the asset management business of State Street Corporation
(NYSE: STT), and written by the Economist Intelligence Unit (EIU),
reveals that 71 percent of institutional investors believe it is
“highly likely” or “likely” that significant tail risk event will
occur in the next 12 months.
Many investors, hit hard by the substantial drawdowns of recent
tail events, are much more wary about the course of the next tail
risk event. The research shows that the crisis in the Eurozone, the
prospect of global or European recession and the slow-down in China
among the concerns.
SSgA commissioned the EIU to survey 310 institutional investors
from across Western Europe and the US in June and July of this
year. The findings are incorporated into a new report entitled
“Managing Investments in Volatile Markets: How Institutional
Investors are Guarding Against Tail Risk Events,” which reveals
that although tail risk events are by definition unpredictable,
investors have become far more sensitive to them, and are taking
more proactive steps to reduce the impact they have on their
investments.
A tail risk, or extreme shock to financial markets, is
technically defined as an investment that moves more than three
standard deviations from the mean of a normal distribution of
investment returns. Only 20 percent of respondents are “very
confident” that they have some form of downside protection in place
for the next significant event, with a further 61 percent “somewhat
confident” of this. However, 73 percent of institutional investors
believe that due to changes in their strategic asset allocation,
they are better prepared for the next major tail risk event than
they were before the start of the financial crisis.
Niall O’Leary, managing director and head of EMEA portfolio
strategy at State Street Global Advisors, said, “The report’s
findings show that tail risk events are nearly always
underestimated, but that given the occurrence of a number of these
events in recent years, sensitivity amongst institutional investors
to them has increased. However, the research also shows that the
benefits of diversification as a tail risk mitigation approach are
unclear and investors are not entirely confident that they are
sufficiently protected from the next event. Adoption of tail-risk
mitigation strategies has been slow, although a large majority of
investors now see managing this issue as an integral part of a
comprehensive investment plan.”
Monica Woodley, managing editor at the Economist Intelligence
Unit, said, “Tail risk has gained a considerable profile as a
result of the major ‘shock’ events that characterised the financial
crisis and the subsequent market volatility. Our research on behalf
of SSgA sought to deepen understanding of the response of
institutional investors to these market shocks and their remaining
concerns.”
Changes in Tail Risk Mitigation Strategies
The data showed shifts in allocation – although interestingly,
despite elevated concerns, the pace of change has been slower than
expected. The widespread impact of tail risk events has resulted in
a large proportion of investors reconsidering the products
available to mitigate the impact of these events, beyond
traditional diversification techniques. The survey showed gains in
allocation to other alternatives, such as commodities and
infrastructure, and managed futures/commodity trading advisor (CTA)
strategies. The allocation to fund-of-hedge-funds declined
significantly, with a 9 percentage point drop from pre-2008
figures.
Barriers to tail risk protection strategies
When asked to define the biggest challenges they face in
allocating to their tail risk protection strategy, 64 percent of
investors indicated liquidity of the underlying instruments. This
statistic was followed by 54 percent who said regulatory
adherence/understanding and risk aversion (49 percent).
Niall O’Leary continued, “The market is still very focused on
the possibility of down-side events and methods to protect against
them. This increased awareness and the willingness to guard against
these events are encouraging, but the pace of adopting tail-risk
strategies has been slow. Investors are still trying to decide
which methods are best in terms of effectiveness and value, and
some concern persists that the tools currently available to
investors are not adequate enough.”
For a copy of the report ‘Managing Investments in
Volatile Markets: How Institutional Investors are Guarding Against
Tail Risk Events,’ visit:
http://www.ssgainsight.com/reports/Economist_Managing_Tail_Risk_Report_pr.pdf.
About State Street Global Advisors
State Street Global Advisors (SSgA) is a global leader in asset
management. The firm is relied on by sophisticated investors
worldwide for its disciplined investment process, powerful global
investment platform and access to every major asset class,
capitalization range and style. SSgA is the asset management
business of State Street Corporation, one of the world’s leading
providers of financial services to institutional investors.
About the Economist Intelligence Unit
The Economist Intelligence Unit (EIU) is the world's
leading resource for economic and business research, forecasting
and analysis. It provides accurate and impartial intelligence for
companies, government agencies, financial institutions and academic
organisations around the globe, inspiring business leaders to act
with confidence since 1946. EIU products include its flagship
Country Reports service, providing political and economic analysis
for 195 countries, and a portfolio of subscription-based data and
forecasting services. The company also undertakes bespoke research
and analysis projects on individual markets and business sectors.
More information is available at www.eiu.com or follow us on
www.twitter.com/theeiu
The views expressed in this material are the views of State
Street Global Advisors through the period ended 27 September 2012
and are subject to change based on market and other conditions.
This document contains certain statements that may be deemed
forward-looking statements. Please note that any such statements
are not guarantees of any future performance and actual results or
developments may differ materially from those projected.
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