Black-Swan-Agnostic Protection
Prepare affordable defenses without predicting the next crisis
- Difficulty
- Advanced
- Time to result
- ~ongoing to results
- Steps
- 6
- Confidence
- 98%
This framework starts with humility: investors cannot reliably identify the next black swan, even when a possible threat appears on a risk register. Instead of hedging a particular narrative, they prepare for recurring market behaviors associated with stress, such as persistent equity declines, bond or gold rallies, and rising volatility. Protection is diversified across assets and trading strategies so the portfolio does not depend on one hedge working. Candidate defenses are also screened for carrying cost because an unaffordable hedge will usually be abandoned before it is needed. Responsive time-series momentum can complement defensive assets by adapting to persistent moves across many markets. Finally, the investor documents and implements the protection plan during calm periods, ensuring that crisis execution follows a strategy rather than panic.
Origin
Extracted from Masters in Business, where Sandy Rattray described strategic defenses for unknowable crises and explained why protection must be robust, affordable, diversified, and established in advance.
Core principles
- 01Accept that the next crisis is unknowable
- 02Protect against market behavior rather than event narratives
- 03Use multiple independent defenses
- 04Prefer protection that can be held continuously
- 05Build the plan before markets become distressed
How to run it
- 1
Abandon event prediction
Accept that the source, timing, and shape of the next severe disruption cannot be forecast reliably. Avoid building the portfolio around a favored disaster narrative.
Pro tip Treat named risks as scenario inputs rather than predictions.
Watch out Protecting against the wrong forecast can create false confidence and new concentrations.
- 2
Model broad stress behavior
Assess how equities, rates, currencies, commodities, credit, and liquidity might behave across several crisis families. Focus on portfolio consequences rather than headlines.
Pro tip Include rapid reversals as well as persistent declines.
Watch out Historical crises provide useful tests but cannot specify the next path.
- 3
Assemble multiple defenses
Combine complementary assets and strategies such as government bonds, gold, alternatives, and time-series momentum. Require each defense to contribute differently.
Pro tip Check whether supposedly independent protections share the same hidden risk.
Watch out Do not pin all diversification on a single asset or strategy.
- 4
Test carrying costs
Estimate the ongoing drag, fees, roll costs, and opportunity costs of each defense. Keep only protection the portfolio can maintain through long calm periods.
Pro tip Evaluate the hedge over years, not just during its best crisis.
Watch out Put options and VIX futures can become too expensive to hold continuously.
- 5
Set responsive rules
Use signals and rebalancing controls fast enough to react when market conditions change sharply. Specify when and how exposures may shift.
Pro tip Test signals that use recent weeks of data against fast historical crashes.
Watch out Slow protection may recognize the event only after losses have already occurred.
- 6
Precommit the plan
Write the crisis response while markets are calm, assign responsibilities, and rehearse execution. During stress, implement the plan rather than redesigning it.
Pro tip Review the plan periodically without abandoning it merely because no crisis has occurred.
Watch out The worst time to invent protection is during the drawdown itself.
In the wild
A Man Group risk manager included an epidemic among roughly twenty possible threats at the end of 2019. The possibility was recognized, but its probability, timing, and appropriate trade were too uncertain to drive action. Rattray uses this to show that naming a threat is not the same as building robust protection.
→ The lesson shifts attention from predicting the event to maintaining defenses that can respond across event types.
A diversified trend strategy monitors equities, bonds, gold, currencies, and commodities for persistent price movement. When an unforeseen crisis creates sustained cross-market trends, the system adjusts positions without needing to know whether the cause is war, credit stress, or a pandemic.
→ The strategy can provide crisis participation while remaining agnostic about the shock's cause.
Common mistakes
Forecasting the next black swan
A black swan is inherently difficult to forecast, so confidence in a specific scenario can direct protection toward the wrong threat.
Depending on one hedge
Gold, government bonds, options, and individual strategies can each fail under particular conditions; a single defense is fragile.
Buying protection you cannot hold
Expensive hedges create persistent losses that tempt investors to cancel them shortly before a crisis.
Is it for you?
Best for
It is best for long-horizon investors who need durable protection against diverse and unpredictable market shocks.
Not ideal for
It is not ideal for investors seeking a single cheap trade that perfectly hedges one precisely forecast crisis.
From the transcript
“the first thing that I portfolio managed to do is realize that you cannot forecast these events.”
“You have to make up your your protection strategy in the months and years before then, and then you had to be implementing it during…”
From the episode
Sandy Rattray on Strategic Risk Management
Sandy Rattray