Exchange trading**, set up to profit from the apocalypse on Wall Street, is also facing its own woes.
The unexpected resilience and record** of the U.S. economy have taken huge losses to a series of ETFs designed to weather so-called black swan events or unexpected disasters such as the 2008 credit crash that threw markets into chaos.
The Simplify Tail Risk Strategy ETF (CYA) said late Friday that it had lost 998%, which is currently being withdrawn and liquidated. Its assets have been reduced from 1$100 million was reduced to about $2 million, and even after a 1-for-20 year reverse split, it fell into penny stocks. The simplified asset manager, which manages the project, declined to comment on the decision.
Similarly** the Cambria Tail Risk ETF (TAIL) has not fared much better: since its inception in 2017, it has lost 46% of its assets, with assets falling from a high of nearly $500 million to $90 million.
For a while, it seemed that this strategy would pay off, as the pandemic, the war in Ukraine, soaring inflation and interest rate hikes brought the world to a standstill, factors that were once thought to be almost doomed to a recession in the United States. However, it bucked the trend, pushing the S&P 500 more than 40% from its 2022 lows. This makes ETFs suffer losses because they are effectively buying insurance against disasters that never happened.
When the market is on an upward trajectory, tail risk strategies don't work well," said Jeffrey Ptak, chief rating officer at Morningstar Research Services. "It's kind of a territorial. ”
ETFs can follow a variety of strategies, although they often buy deep out-of-the-money puts on the S&P 500 (allowing them to sell for a profit when the market is large**) or call options that profit from a large margin. The CBOE Volatility Index (VIX) peaked. Simplifying tail risk** uses a mix of both.
But when these events don't happen, the derivatives contract expires worthless, losing everything they paid for. The Janus Velocity Tail Risk Hedged Large Cap ETF also liquidated in 2018. Another one, called the Fat Tail Risk ETF, followed in 2022.
At the end of last year, U.S. Bonds and Narrow, Simplified Tail Risks were hit hard by optimism that the Fed would end its rate hikes with the economy intact.
This tail risk hedging can deliver huge returns in sharp, abrupt market contractions, such as the pandemic in March 2020 or the collapse of Lehman Brothers in 2008. And these ** are designed to withstand losses until such a catastrophe occurs, and great rewards follow.
Meb Faber, chief executive of Cambria Investment Management, said its tail risk performed well relative to the rest and had "fewer losses" in the market. He said he expects interest in the exciting ** to increase as risk sentiment fades and the exciting valuation is re-examined.
If the market turns trending," he said, "we'll see a lot of money flowing back into tail." ”
##