Following the Crash and Nassim Taleb, Firms Start to Offer Black Swan Protection

PIMCO is the latest vendor with plans to offer protection against violent market swings following the 2008 collapse and warnings by commentators such as Nassim Taleb of “Black Swan” fame.

(July 21, 2010) — Following the crash of 2008 and the rise to prominence of commentators such as Nassim Taleb, financial firms are increasingly looking to market products aimed at helping firms protect against ‘Black Swan’ events.

According to reports, Pacific Investment Management Co. (PIMCO) – the giant west-coast fixed-income specialist – is planning on offering investors a product that would protect against a 15% drop in market value. Deutsche Bank and Citigroup also offer products that provide hedging against “tail risk” events, now more commonly known as “Black Swans” after the rise to prominence of finance author Nassim Taleb.

“How should institutional investors invest?,” Taleb asked ai5000 earlier this year. “Exactly my barbell idea in which one keeps high cash reserves while taking aggressive risks but with a small portion of the portfolio.” However, Taleb has expressed a belief that few funds will be able to stick with such a strategy and the products used within it. “They will drop like flies,” Taleb is quoted by Bloomberg as saying. “They and their customers will give up at some point. I’ve seen it before.”

Regardless of investor staying power, the logic behind such products is commonly accepted. “Everyone is starting to realize that this is going to be a much longer, much more difficult path to recovery,” says State Street’s William Cunningham, according to Bloomberg. “It’s really quite fragile and vulnerable in a way that we haven’t seen in our lifetime.” At least some investors, including the Indiana state public pension fund, have expressed interest in such products.

For ai5000’s exclusive video series with Nassim Taleb, click here.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742