Institutional investors increasingly are concerned about tail risks, yet many remain unprepared for those events, Allianz Global Investors’ semiannual RiskMonitor survey shows.
Nearly 66% of the 735 asset owners surveyed reported tail risks have become an increasing worry since the financial crisis.
The most likely cause of upcoming tail events are oil price shocks, followed by sovereign defaults, European politics, new asset bubbles and a eurozone recession, according to global investors.
However, only 27% of respondents have tail-risk hedging strategies in place and only 36% believe they have access to tools or strategies to deal with such events. In fact, 56% of global respondents believe tail-risk hedging strategies are too expensive and 35% believe tail risks themselves are not understood. Conventional risk management approaches such as geographic and asset class diversification, on the other hand, remain the most favored by the survey respondents.
Moreover, better risk management tools for alternative investments are particularly needed, according to asset owners.
The survey also reviewed asset allocation trends and found that 30% of global investors expect to buy European and/or U.S. equities in the next 12 months because of high return potential, while nearly 30% expect to short developed markets sovereign debt because of its low return potential and other risks.
“The risk of a correction in the market is growing with valuations continuing to rise, geopolitical tensions festering and U.S. monetary policy tightening on the horizon. In general, institutional investors’ current asset allocations make sense, but the problem is that many of these investors are not incorporating the proper risk management tools to protect these investments from market volatility. Risk assets are where investors should be in a time of financial repression, but their associated risks need to be well managed,” said Kristina Hooper, U.S. investment strategist at AllianzGI, in a news release about the survey results.
The survey of 735 asset owners was conducted in the first quarter of 2015.