Bloomberg News

El-Erian Says Risk of Extreme Market Outcomes Has Increased

October 04, 2011

(Updates with additional comments in second paragraph.)

Oct. 4 (Bloomberg) -- Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said the risk of extreme market outcomes known as “fat tails” has increased because of the sovereign-debt crisis in Europe and slower economic growth in the U.S.

“We have fatter tails on both sides,” El-Erian said today during a conference in Boston. “You’ve got to manage your tails much more actively.”

El-Erian, who shares the title of chief investment officer with Bill Gross at Newport Beach, California-based Pimco, said higher volatility and extreme outcomes are part of what he has called the “new normal.” Lacking a clear solution from policy makers in Europe and the U.S. to address burdensome debt loads and other obstacles to growth, investors have to guard against the risk of negative outcomes by using a technique called “tail-risk hedging,” El-Erian said.

“Tail hedging gives you a claim on the upside and protects you on the downside,” El-Erian said. “It is no different than buying car insurance.”

Under the new normal scenario popularized by Pimco, developed economies such as the U.S. will grow slower than their counterparts in emerging markets because of higher rates of unemployment and heightened government regulation.

“The unthinkables have become a reality,” El-Erian said today.

The U.S. faces many “structural impediments” to growth The real unemployment rate in the U.S., including workers who have given up looking for jobs, is closer to 20 percent, El- Erian said.

Europe faces a bigger problem than the U.S. because of the inability of policy makers to address the debt crisis, he said.

Pimco, which manages about $1.4 trillion in assets, is a unit of Munich-based insurer Allianz SE.

--Editors: Christian Baumgaertel, Steven Crabill

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at

To contact the editor responsible for this story: Christian Baumgaertel at -0- Oct/04/2011 14:23 GMT

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