Inspired by Pine River Capital Management’s new fund that’s supposed to help you hedge tail risk, Felix Salmon lays out how difficult it is to do this. Strategies that are available to the average investor—buying international stocks as well as domestic ones, for example—generally don’t work. Strategies that do work generally aren’t accessible.
Which I think helps highlight one of the most-pernicious but least-discussed trends of the past thirty years, the drive to replace defined-benefit pensions with subsidized savings/investment schemes like 401(k)s. This democratization of investing has been celebrated by many, and memorably lampooned by Thomas Frank, but rarely subjected to adequate scrutiny. The fact of the matter seems to be, however, that average people have no real ability to invest money in an effective way. I’m a pretty typical 401(k)-holder at this point—a college educated professional who has neither the time, inclination, or competence to do due diligence on the firms I “own” through my investment vehicle. The good news is that I know a person in that situation should invest in index funds rather than try to pick stocks. The bad news is that, per Salmon’s post, it’s not really possible to hedge yourself against tail risk this way. What’s more, the flipside of small investors not being able to manage our own investments in a sound way is that having small investors participate in the market can only serve to undermine financial markets’ role in providing corporate governance and allocating capital.
Now defined-benefit pensions have declined in the private sector for some pretty good reasons. It’s both personally liberating and economically efficient for there not to be an expectation that you’ll work at the same place for decades. But the substitutes we’ve dreamed up—tax subsidies for middle class stock ownership—are regressive and don’t really make sense.