The economy looks to be back on top for the moment with record highs over the last week but don’t get to excited yet! George Sokoloff, founder and CIO of Carmot Capital, recently explained why typical asset allocation strategies, including those employed by most “sophisticated” hedge fund managers, end up getting slaughtered during market shocks despite perceptions of being “well hedged”. One has to look no further than the last “great recession” to get a glimpse of just how well the typical “hedged” portfolios fared during the last “Black Swan” event.

According to Investopedia, A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict; the term was popularized by Nassim Nicholas Taleb, a finance professor, writer and former Wall Street trader. Black swan events are typically random and are unexpected.

 

Unfortunately, large pools of institutional capital have grown increasingly accustomed to making allocation decisions based on short-term returns and relative performance rather than absolute returns over extended periods of time. Therefore, massive losses are ok as long as everyone is losing money at the same time, right? Absolute returns only matter to the suckers that are actually planning to use those pension assets to retire at some point. CONTINUE