Allianz Global Investors has published the 2015 edition of the global risk survey conducted among institutional investors. According to the Allianz report, the main paradox is that although two-thirds of institutional investors consider tail risk events increasingly worrying, only 27% adopt hedging strategies for this type of risk and only 36% believe they have access to adequate tools to handle such events. As far as investment trends are concerned, according to Allianz, international investors are considering replacing their allocation to government debt with equity securities.
Global Risk 2015
In the third edition of the Allianz international survey, it appears that institutional investors consider tail events, such as oil price shocks, new asset bubbles in various market segments or geopolitical tensions, to be increasingly frequent due to the interconnection of global financial markets.
Tail risk - explains Allianz - has become a recurring theme since 2008, a year which reminded investors that anomalous events are potentially capable of generating a devastating impact on the market and that their frequency is higher than what could be expected on the basis of a normal configuration of the curve. Nonetheless, traditional portfolio allocation strategies leave investors unprepared for the frequency of these events.
About two-thirds (66%) of the 735 institutional investors surveyed for the study believe that concern about tail risk has grown in the aftermath of the financial crisis. However, the majority of respondents say they rely on traditional asset allocation and risk management strategies to protect their portfolios, with 61% resorting to diversification across asset classes and 56% resorting to geographical diversification. In light of the interconnectedness of the markets, these types of diversification will be increasingly less effective in mitigating the risk of reduction in capital value (the so-called drawdown). In fact, only 36% believe they have access to adequate solutions or tools for managing tail risk.
Commenting on the survey results, Elizabeth Corley, CEO of AllianzGI, he underlined: “The results of this study highlight a significant paradox: while nearly two-thirds of institutional investors are increasingly concerned about tailwind events in the aftermath of the financial crisis, a far smaller proportion believe they have access appropriate solutions or tools to deal with such events. With expectations of tailwind events increasingly frequent, there is an important role for active managers to assist clients understand, categorize, assess and ultimately mitigate the downside risk triggered by these outliers, while also providing upside opportunities.” .
