The rising frequency of market disruptions has expanded interest in tail-risk hedging well beyond pension funds and endowments. Berouz Fatemi outlines how systematic, rules-based strategies are providing a more transparent and cost-efficient alternative to traditional hedging techniques.
“What can go wrong in markets next?” That’s the first question asked by investors each month to Berouz Fatemi, who manages the Paladin Defensive Strategy at Investcorp-Tages. A volatile market environment, prone to significant peaks and troughs, has crystallised the importance of downside protection across portfolios. Investcorp-Tages has established itself as a leader in tail-risk hedging, where derivatives and uncorrelated strategies act as financial insurance during market slumps.
Fatemi has been at the centre of managing tail-hedge portfolios for institutional investors for close to a decade. He defines the mechanism as “giving investors the confidence to remain invested.” Quantitative easing in the 2010s created the possibility of a market realignment in the future, where interest rates rose, and investors who had accrued heavy exposure to credit and equities would require tools to hedge within their portfolio.
Fatemi capitalised on this shift to develop systematic strategies for investors, with a properly diversified portfolio across several asset classes and regions. To address the limitations of traditional option strategies, the team designed a suite of solutions that deliver targeted convexity in specific market environments, significantly lowering the cost of carry during benign market conditions. Tamizhmarai Rajendran, Executive Director at Nomura, notes that the investment universe around hedging is continuously expanding: “Investors are increasingly considering asset classes and strategies outside traditional equity hedging strategies, such as volatility in interest rates as a hedge,
A key pillar of systematic hedging is the elimination of discretion. Rather than relying on subjective judgement, exposures are determined by a predefined set of rules, providing investors with transparency and consistency. As Fatemi notes, “Investors rely on tail hedge strategies as part of their risk management process and need to know their exposures at different times.”
Beyond SMAs and pooled fund vehicles, Investcorp-Tages delivers its hedging solutions through structured notes/certificates and total return swaps in collaboration with a major investment bank. As investor preferences continue to evolve, daily liquidity and capital-efficient, unfunded implementations have become increasingly important considerations when selecting hedging strategies.
The investor base for tail-risk hedging was traditionally dominated by large pension funds and endowments. Now, products like these are drawing significant interest from family offices, private banks, and smaller investors with equity exposure who are looking to manage downside risk. “This investor profile is looking at a much wider range of assets, including private equity and private credit. They manage large portfolios and understand that traditional correlations, diversifiers and hedges don’t always work.
The importance of tail-risk strategies within a portfolio was highlighted in a recent paper by Fatemi examining the structural re-rating of US equities. “Investors today face a challenging environment characterised by competing narratives: participating in the AI-driven growth story, assessing whether valuations remain justified by underlying fundamentals, and understanding the market impact of ever-growing passive investment flows.”
“These forces have driven a significant concentration of market capitalisation among a small number of companies, increasing the risk of asymmetric outcomes. While passive inflows generally accumulate gradually and support valuations over time, periods of market stress can trigger a rapid reversal. Passive fund redemptions often result in indiscriminate selling, with the largest index constituents bearing the brunt of the pressure. Consequently, the same structural flows that have contributed to elevated valuations may exacerbate downside risks during market corrections, highlighting the role of tail-risk strategies as a source of portfolio resilience.”
