One legacy of the recent financial crisis is that many investors have become acutely aware of the greater possibility of extreme asset returns, or "fat tails," as they are often called.
"We have just gone through a period of fat tail returns and investors are sensitized to the possibility," Gordon Fowler, the president, CEO and chief investment officer of Glenmede, writes in the firm's November investor letter Review & Outlook. As a result, he says, protection against extreme outcomes has shot up in price to levels he considers "unreasonable."
Fowler says the protection often takes the form of long Treasury bonds, which "are pricing in Japanese-style deflation"; gold, which "is pricing in hyperinflation"; and the cost of equity portfolio protection, which "reflects a perceived probability of a 40% price decline within one year."
