Understanding tail-risk

May 2018

Sometimes referred to as a black swan or tail-risk, a fat-tail event is when something occurs that was unexpected or was thought to be so far- fetched that it was nearly impossible.

Due to their nature, these thought-to-be extremely improbable events can turn a well-constructed portfolio on its head. For an investor, this problem can be particularly acute because the traditional tools in the investor toolbox assume that the world that we invest-in is a normal one. Unfortunately, investors have been repeatedly reminded that the world is often not normal and tackling this problem requires a specialized toolbox to measure, understand, and prepare for these events.