(Bloomberg) -- Traders are rushing to insure their portfolios against an extreme market crash, in an echo of the chaotic period at the start of the pandemic.
As the fear factor mounted on trading desks across Wall Street on Monday, the Cambria Tail Risk ETF (ticker TAIL), an actively managed exchange-traded tail-risk fund, jumped 4.5% for its best day since March 2020.
Long among the biggest laggards during the relentless bull market, the defensive strategy — often known as Black-Swan hedging — is suddenly in vogue. The dash for protection comes as the tech-heavy Nasdaq 100 Index saw its biggest intraday slump since 2022, ending the day 3% lower. Wall Street’s “fear gauge” - the VIX - spiked to the highest level since the coronavirus outbreak amid concerns over the Federal Reserve’s ability to avoid a recession.
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In the options market, the cost to protect for tail-risk hedges that pay out in the event the S&P 500 Index falls as much as 30%, or three deviations — a Black Swan event — is also the highest since March 2020.
“We can see across a variety of vol metrics that there is heavy demand for ‘crash’ protection, the likes of which we haven’t seen since the peak of the COVID shock,” said Charlie McElligott, a cross-asset macro strategist at Nomura Securities International Inc.
Another sign that investors are bracing for turmoil can be found in the VVIX, a measure of the volatility of the VIX. The metric ended the day at the highest level since early 2020 as well.
Tail-risk hedging has proven profitable during sharp selloffs, but has failed to deliver significant gains in more gradual drawdowns. And the funds, by design, take losses until such a markets disaster strikes and big payoffs roll in.
One of the biggest Black-Swan funds available to US retail investors, the Cambria ETF has seen its assets shrivel to about $80 million from nearly $500 million in 2022. It’s part of a dwindling pool of publicly traded investment vehicles that aim to profit from unexpected calamities. Many of its peers have closed amid the relentless equities rally. Until recently, the popular trade in 2024 was to use options to bet on calm in equities or to chase gains in technology shares, not to protect against a crash.
“Tail hedges are coming into play, so good for those who had them on already,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. “However, for those looking to add tail hedges now, they have gotten very expensive very quickly.”
--With assistance from Lu Wang.
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