Black Swan Hedge Funds Lose Favor After Hot Streak

Black Swan Hedge Funds Lose Favor After Hot Streak

Black swan hedge funds, which are designed to protect investors against unforeseen events have seen their AUM shrinking as investors become increasingly confident that central banks can avert dangerous doomsday events, according to a report from Reuters.

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Though the economic and geographical dangers continue to haunt the global economy in the form of messy Cyprus bailout and North Korea’s continued threats to the U.S., investors continue to pull money out of tail risk funds.

Black Swan Hedge Funds Lose Favor After Hot Streak

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Despite such woes, the stock markets have touched all-time highs while the volatility index has fallen to its lowest level since before the 2008 financial crisis. Investors have shown so much confidence because of the repeated assurance from the central banks around the world.

Last year, ECB chief Mario Draghi promised to do whatever it takes to preserve the euro. Policy makers in Japan and the United States have promised to stimulate their respective economies. These moves have negatively affected the black swan or tail risk funds.

Tail risk funds protect investors against rare doomsday events. They got the name black swan from the popular trader and academic Nassim Nicholas Taleb’s book “The Black Swan“. Investors in one of the Europe’s largest hedge funds, Capula, have redeemed about half of the assets or $1.1 billion from its Tail Risk Fund, since June 2012, two Capula investors told Reuters. 

Capula’s tail risk fund now has $1.4 billion in assets, and the fund dropped 14 percent last year as sentiments grew that ECB will do everything to calm the Eurozone crisis. Not too long ago, black swan hedge funds were enjoying significant growth as investors tried to buy protection in the highly uncertain market.

Other black swan funds also demonstrated a similar track record. Pine River Capital’s tail risk fund fell about 36 percent and its assets declined from $300 million to $200 million. A Pine River Capital investor told Reuters. Swiss investor Unigestion had launched a tail risk fund as the economic crisis began. But it closed the fund in 2010 as markets around the world began to rally.

So far in 2013, Capula’s tail risk strategy is up 0.56 percent, while Pine River’s tail risk fund declined 3.58 percent. Saba Capital also has a black swan fund that gave negative returns last year, sources familiar with the fund’s performance said.

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