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The PIMCO Approach to Avoiding 'Black Swan' Events

Morningstar Investment Conference panelist Vineer Bhansali attempts to control risk in new ways.


Like many great ideas, this one came together unexpectedly at a meeting between old colleagues. The story of the development of PIMCO's tail-risk hedging strategy began as a casual chat between two highly respected scholars of finance: Vineer Bhansali and Mohamed El-Erian.

Bhansali, head of PIMCO's 14-person analytics team, was in Boston delivering a conference paper. El-Erian, who had worked at PIMCO, was at the time president and CEO of Harvard Management Co., the firm charged with managing Harvard University's endowment. Bhansali met up with his former colleague to discuss a novel hedging approach that he was developing at PIMCO. As it turned out, El-Erian was doing something similar at Harvard.

The approach, called "tail-risk hedging," aims to protect portfolios that deploy the strategy from rare and systemic shocks. Popularly referred to as "black swans," these events can wreak havoc on portfolios. They are the dramatic losses that appear on the far left end--the "tail"--of a probability distribution curve of investment returns. Their chances of happening are supposed to be minute, but some in finance and economics believe that the shocks occur more frequently than commonly thought, and people are developing ways to hedge against the risks posed by these shocks.

Lawrence Jones does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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