Financial institutions, businesses and governments are interconnected in ways that are often hard to ascertain or measure. Leverage through the use of debt has become increasingly prevalent, and volatility has been artificially suppressed through central bank policies. Although markets are inherently susceptible to periods of instability, in the current global environment, unexpected and highly consequential negative market events, commonly referred to as "Black Swans", are more likely to occur. When extreme market risk does materialize, the impact is almost instantaneously transmitted from country to country. In this context, a significant financial crisis can be expected to affect all assets and regions.
Tail-protection removes the need to make forecasting and timing decisions, like raising cash in anticipation of a market decline, that might ultimately prove wrong, whilst still permitting the capture of upside gains if stocks continue to rise. A tail-hedged portfolio is thus not just robust to severe market declines but antifragile in that it benefits from volatility.
“The essence of investment management is the management of risks, not the management of returns. Well-managed portfolios start with this precept.” - Benjamin Graham