CFA Institute Blog – Creating Anti-Fragile Portfolios


23/08/20

Joseph Walsh – jwalsh14@mail.bbk.ac.uk


https://blogs.cfainstitute.org/investor/2020/08/03/creating-anti-fragile-portfolios/

This article gives a great practical introduction to the concept of antifragility and its implication on investing and the wider financial markets. At this point you might be thinking – what is antifragility and how is it relevant to investing?

It is a concept developed by Professor Nassim Nicholas Talem which he defines in his book of the same name:

“Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.”

Taleb uses ancient examples to explain the triad of Fragile, Robust and Antifragile. Damocles, who dines with a sword dangling over his head, is fragile. A small stress to the string holding the sword will kill him. The Phoenix, which dies and is reborn from its ashes, is robust. It always returns to the same state when suffering a massive stressor. But the Hydra demonstrates Antifragility. When one head is cut off, two grow back.

This same concept can be applied in financial markets through products and strategies that utilise the Volatility Index or VIX. Being long volatility is an example of antifragility, as the investor benefits from higher levels of shocks to the market. There are of course benefits and drawbacks to implementing long or short volatility strategies. One notable example is the infamous collapse of XIV in early 2018, showing the consequences of being short volatility during a market correction. But using volatility in a sensible manner can definitely be a powerful tool in a portfolio.