Allianz GI: Institutional investors not prepared for tail risk

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While two thirds of institutional investors considers tail risk events an increasing source of concerns, only about one third have tail risk hedging strategies in place, according to the recent Global Risk Monitor survey conducted by Allianz Global Investors (Allianz GI).

The study highlighted that respondents consider tail-risk events, such as oil price shocks, new asset bubbles or geopolitical tensions, are becoming increasingly frequent due to the interconnectedness of global financial markets.

Oil price shocks continue to be seen as the biggest threat by 28% of investors, whereas 24% are worried about sovereign defaults and European politics, 24% anticipate further asset bubbles to be a key risk and fear of a Eurozone recession is crucial for 21% of investors.

In terms of portfolio allocations, 30% of respondents globally plan to buy European and/or US equities in the next 12 months due to their high upside potential. From a bearish perspective, 29% investors say they will sell sovereign debt  and nearly a third (31%) of investors are adamant that the asset.

Ingo Mainert, CIO Balanced Europe at AllianzGI, commented: “The risk of a correction in the markets is growing with valuations continuing to rise, geo-political tensions festering and US monetary policy tightening on the horizon.  In general, institutional investors’ current asset allocations make sense, but the problem is that many of these investors are not incorporating the proper risk management tools to protect these investments from market volatility.”

“Risk assets are where investors should be in a time of financial repression in order to achieve their return targets but their associated downside risks need to be well managed. When choosing their downside protection investors should also consider the liquidity within the strategy” Mainert adds.

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