Extreme outcomes in markets have led to investors demanding innovative solutions to cap risk and minimise drawdowns. Some forms of so-called tail risk protection like put options are simple and have been used by investors for decades.

Now, however, institutional investors, notably pension funds and life insurers, are demanding more comprehensive and finely calibrated types of tail risk protection. It is demand from this quarter that AXA Investment Managers, now managing $5.4 billion, is targeting with its recent launch of a series of funds of hedge funds that will aim to protect investors from shock market events and longer-term trends. The move follows the success of some similar investment strategies during the volatility that has characterised markets in 2011.

“The objective of the tail risk funds is to provide strong inversely correlated returns to equities and equity-related assets in times of high stress,” says Francisco Arcilla, who joined as Global Head of AXA Funds of Hedge Funds from EIM in October. “In normal market conditions, it offers a plus or minus low single digit return with some additional alpha generation. The aim of the strategy is to be de-correlated.”

Low volatility orientation
The portfolio manger of the Tail Hedge strategy is Ryan McRandal. He is being backed by the mainly London-based fund of funds’ 37 staff, including a dozen investment professionals. The business takes a multi-strategy approach to hedge fund investing, focusing primarily on low volatility strategies. It runs mostly customised mandates for internal AXA funds related to its insurance business as well as external customers like pension funds and other life insurers. The fact that AXA allocations are the biggest share of the fund of funds business underpins the genuine alignment between the giant insurance parent and external investors.