President's Blog

Hedging Systemic Risk with Equity Derivatives: Perspective and Techniques

July 9, 2012
post contributed by Megan Flynn

Dean Curnutt, President of Macro Risk Advisors and a member of the NYHFR himself, gave an entertaining presentation in March on Systemic Risk. “I am going to get technical but I’ll try to keep it lively”, he began.

Systemic Risk makes investing more problematic and it comes from how truly interconnected the financial system is; it’s only as strong as the weakest link. The counterparty network is so interconnected, he said, that the system is a threat to itself. Once set in motion, systemic risk events can be difficult to contain and may create violent, negative feedback loops.

“Once systemic risk starts to go, it goes fast” he said. The system is so debt dependent, and it all fluctuates based on doubts that debt will be paid back. It’s a hassle investing in a systemic risk environment; it renders fundamental analysis less effective and is bad for valuation, Curnett explained, and when systemic risk starts to go up, the probability of government intervention goes sky high.

The presentation progressed to George Soro’s Theory of Reflexivity and the systemic risk caused by the dynamics of European leadership before the event closed with discussion sparked by members questions.

close