Since the Global Financial Crisis,  the structure of financial markets has undergone a dramatic shift. Modern markets have been “zombified” by a combination of Central Bank policy, disintermediation of commercial banks through regulation, and the growth of passive products such as ETFs.  Increasingly, risk builds up beneath the surface, through a combination of excessive leverage and crowded exposure to specific asset classes and strategies.  In many cases, historical volatility understates prospective risk.

When certain agents in the financial network behave differently or in larger scale than they have in the past, traditional portfolio theory breaks down.  It can no longer account for toxic feedback effects within the network.  Our feedback-based risk adjustments allow investors to size their positions sensibly in dangerous set ups, where volatility is not providing an accurate barometer of true risk.

The authors have drawn from the fields of statistical physics and game theory to simplify and quantify the impact of very large agents on the distribution of forward returns, and to offer techniques for dealing with situations where markets are structurally risky yet realized volatility is low.  The concepts discussed here should be of practical interest to portfolio managers, asset allocators, and risk professionals, as well as of academic interest to scholars and theorists.

The Second Leg Down offers practical approaches to profiting after a market event. Written by a specialist in global macro, volatility and hedging overlay strategies, this book provides in-depth insight into surviving in a volatile environment. Historical back tests and scenario diagrams illustrate a variety of strategies for offsetting portfolio risks with after-the-fact options hedging, and the discussion explores how a mixture of trend following and contrarian futures strategies can be beneficial. Without a rational analysis-based approach, investors often find themselves having to cut risk and buy protection just as options are at their most over-priced. This book provides practical strategies, expert analysis and the knowledge base to assist you in recovering your portfolio.

Hedging strategies are often presented as expensive and unnecessary, especially during a bull market. When equity indices and other unstable assets drop, they find themselves stuck – hedging is now at its most expensive, but it is imperative to hedge or face liquidation. This book shows you how to salvage the situation, with strategies backed by expert analysis.

• Identify the right hedges during high volatility
• Generate attractive risk-adjusted returns
• Learn new strategies for offsetting risk
• Know your options for when losses have already occurred

Imagine this scenario: you've incurred significant losses, you're approaching risk limits, you must cut risk immediately, yet slashing positions would damage the portfolio – what do you do? The Second Leg Down is your emergency hotline, with practical strategies for dire conditions.