Universa, Towers Watson partner on tail risk investing

Opalesque
July 14, 2015

Miami-based Universa Investments has formed a strategic relationship with Towers Watson. As part of the relationship, Towers Watson will reserve sufficient capacity in Universa’s tail risk strategy to hedge equity investments on behalf of their Endowment and Foundation clients.

The relationship will focus on the incorporation of tail hedging at the portfolio level, which requires a portion of a portfolio’s capital--with the goal of eliminating the 'left tail’ of downside risk through an allocation to Universa’s Black Swan Protection Protocol strategy. The BSPP attempts to protect the long equity portion of the portfolio against systemic market shocks and crashes, with the goal of enhancing long-term returns and significantly lowering risk.

The relationship is the first of its kind for Universa. "For us, the relationship makes a lot of sense because we believe strongly that tail hedging can be a means to higher risk-adjusted returns," said Brandon Yarckin of Universa in an interview with Opalesque. "We think for endowments, foundations, and defined benefit plans, having a greater certainty of maximum loss allows them to make much better risk investments in the rest of their portfolio."

"Tail risk is a polarizing topic for people and done incorrectly it can be expensive. But if appropriately managed and used as a part of overall portfolio construction, one can transform the risk vs. return characteristics of the portfolio. It becomes a much easier, and entirely mathematical, argument when presented in this fashion."

To that end, both firms intend to make education a significant portion of their efforts. Brian Caldwell, who advises U.S. endowments and foundations within Towers Watson, notes that adding tail risk solutions to the way the firm advises on portfolio construction adds a new layer of risk management to the conversation.

"We want people to understand that there are other options beyond traditional allocation strategies," Caldwell says.