Protect Ya Neck

The tail risks keep coming, thick and fast. Just in the past few weeks: geopolitical flare-ups, huge volatility in precious metals, a software selloff, Federal Reserve independence concerns, Japanese yields hitting record levels. And it's only February.

There’s plenty more to worry about for the rest of the year as I’m outlining in this video. The question now is “what can we actually do about the tail risks?’’.

Our framework

Loosely, we think about four steps when it comes to tail risks and risk management in general: identify, measure, communicate, manage. The first three matter, but the fourth is where the rubber meets the road.

Identifying risks means staying on top of markets, positioning and performance. Some risks are obvious (AI concentration, geopolitics). Others are harder to spot (crowding, deleveraging). Spending time thinking about everything that could go wrong might not win you many friends, but it helps.

Measuring tail risks means stress testing, quantifying how much it'll cost if the risk materialises. Replaying historical events against your portfolio is useful. Sometimes we need hypothetical scenarios. The point is to move from "this feels bad" to "this could cost X."

Communicating risks is often neglected, but that's an article in itself. As risk managers, we need to help portfolio managers, management and investors see the wood from the trees.

Managing the risk is where it gets practical. There are tactical actions we take in the moment, and strategic actions we build in from the start.

Tactical: what we do when it's happening

Maintain discipline. Paradoxically, worries about tail risks are coinciding with strong returns across many strategies. The instinct might be to let winners run, but rebalancing back to targets and taking profits keeps the portfolio shape intact. Discipline also applies in drawdowns: stick to risk limits.

Review allocations. Sometimes we need to move more significantly. March 2020, when the COVID lockdown hit, was a good example. Some funds in our portfolios were contributing more risk than intended, and trimming made sense. It was possible to do that if those funds had sufficient liquidity. Back then, that might have been reactive, but sometimes we know a risk event is coming and can adjust ahead of it.

Get faster. Whether you're picking managers or running positions yourself, it helps to ask how quickly exposure can be cut. In our experience, faster-moving strategies tend to fare better in tail events. When tail risks are elevated, running directionality through things that can derisk quickly offers some comfort.

Consider hedging when it's cheap. US equity volatility has picked up in February but still looks relatively benign against the level of economic uncertainty. When implied volatility is low and tail risk high, that could be an opportunity to add hedges.

Figure 1. US equity volatility has shown little reaction to elevated US economic uncertainty

Source: USEPUINDXM is the US Economic Policy Uncertainty Index. It measures economic uncertainty based on the frequency of articles referencing economic policy uncertainty in major US newspapers. Bloomberg, as of 12 February 2026. 

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Better still: we like to have tail managers in our portfolios that will hedge for us.

Accept. If measuring the tail risk shows it's within tolerance, sometimes the answer is to live with it. Risk management isn't about reducing all risks to zero. It's about knowing which ones you're willing to carry.

Strategic: what we build in from the start

Size to tail risk. Before allocating to a fund, it’s crucial that we assess the worst possible tail event. This helps differentiate things that look benign on volatility measures but carry large tail risks, so-called "short volatility" profiles. Fixed income arbitrage is a classic example: low vol, but nasty tails.

Figure 2. A classic example is fixed income arbitrage

Source: Bloomberg, as at 31 January 2026.

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We size inverse to that tail risk.

Diversify the tail risks. Some strategies become more correlated in extreme events and could experience large losses at the same time. Grouping these tail risks together, giving them a budget, and ensuring diversification where it actually matters means fewer nasty surprises.

The bottom line

Tail risks aren't going away. In our opinion, the answer isn't vague anxiety about amorphous risk. It's translating that concern into concrete steps. Identify, measure, communicate, manage. Whether you're allocating to funds or running a book, the framework holds. That's how you protect ya neck.

All data sourced from Bloomberg unless otherwise stated. 

Authors: Faisal Javaid, Head of Investment Risk, External Alpha, at Man Group.

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