The financial crisis has given rise to a lot of talk about fat tail risk, which might be seen as events with a probability of occurring at least three sigmas away from the average. A crop of hedge funds has arisen that give investors a chance to hedge against these events.

London-based Capula Investment Management launched a tail-risk fund that now has $1.5 million in assets, notes CNBC. Pine River Capital of Minnetonka, Minn., has opened a similar fund in June with $200 million in assets; it now has more than $300 million. Saba Capital has also opened such a fund.

Most strikingly, according to CNBC, PIMCO is weighing whether to launch a private fund that would hedge against tail risk. The idea is to use credit default swaps, various futures, and other derivatives to generate some profits as the likelihood of a black swan event rises.

It would be normal for these types of funds to make no money in an average month. When times are stable, however, the challenge might be to simply tread water.

Some might decry this is an exercise in fads. But the marketing opportunity right now cannot be denied. Still, hedging against some sort of meltdown strikes me as difficult. The worse would be for such funds to fail to deliver in a crisis--which could happen.

For more:
- here's the CNBC article

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