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We are certainly not interested in being known as alarmists, but as investors we do need to be aware of potential tail risks. Conventionally, a tail risk is defined as a possibility that a portfolio will move more than three standard deviations from the mean. In a normal distribution, this possibility is 0.03%, or virtually nil. In practice, tail risks are often more common than a normal distribution might suggest. We have been negative on India for some time, and short the country via the IFN, and were again reminded of the tail risks associated with investing in the region yesterday.

India is presently facing the consequences of overpopulation and unsanitary living conditions. As a result, Indian authorities confirmed a new outbreak of the deadly bird flu virus in the eastern state of West Bengal yesterday.

A state official found the H5N1 viral strain of bird flu in samples taken from dead chickens. Some five million poultry has already been killed by authorities to contain the virus, adding to the 250,000 chickens that were slaughtered since the virus was detected late last month in poultry.

To date there has been no confirmation of a human case of the deadly H5N1 virus in India, yet health officials are monitoring at least 100 people who have started showing signs of the virus in the way of fever and respiratory tract infections. The government has begun offering farmers money in compensation for infected chickens to quickly offset the spread of the virus.

Since 2003, bird flu has infected 389 people in 15 countries, particularly in Indonesia, China, and Vietnam. Just 39 cases of the human H5N1 strain have been reported this year, including 29 that led to deaths.

So far, bird flu's tail risk has been minimal on a global level because of its inability to easily pass from human to human, yet studies are currently testing if a genetic change could make it easier for bird flu to pass from chickens to people. If such a link proved easily transmissible, it could trigger a global epidemic.

As BBC noted in an article on the bird flu outbreak yesterday: “While no case of humans being infected by bird flu has been reported from anywhere in India, experts fear the H5N1 virus might mutate or combine with the highly contagious seasonal influenza virus and spark a pandemic that could kill millions of people.” Although the odds are low, the potential for a major human impact from bird flu is a possibility.

This increased outbreak of bird flu adds another supporting factor to our bearish macro outlook on India as we head into 2009.

Today, we covered our short position in IFN because it was down -5%. That’s part of managing risk too. Keep moving.

Daryl Jones
Managing Director

Matthew Hedrick
Analyst