Black Swan Hedge Funds Are Booming in Scary Times
Money managers are selling insurance against sudden market drops, but the strategy is expensive and doesn’t always pay off when the market falls.
An increasingly popular sales pitch on Wall Street goes like this: If you’ve insured your home against some disaster, or even a total loss, shouldn’t you do the same for your investment portfolio? In the case of a house or apartment, the danger would be fire, flooding, or perhaps a devastating storm. In the financial markets, it might be a sudden spike in volatility and a rapid decline in prices that wipes out months if not years of gains.
For investors of all stripes, from the most august institution to the scrappiest day trader, the current maelstrom of sustained inflation, never-ending pandemic, war, rapidly rising interest rates, swooning tech stocks, and crypto collapse—what economic historian Adam Tooze calls a polycrisis—feels like the equivalent of a Category 5 hurricane. So it’s no surprise the pitch is working. Everyone, it seems, is looking for a way to ride out the storm in one piece.