During periods of significant market stress, it is important to define a hedging strategy that aims to generate outstanding performance, while targeting positive returns during bull markets. This can be achieved by being dynamically exposed to volatility.
Why hedge your equity portfolio, and why now?
Equity markets offer investors endless opportunities but investing in equities also poses risks. Historically, stock markets have spent more than 70% of their time recovering from drawdowns, which have a huge impact and are virtually impossible to anticipate. Furthermore, increasing cross-asset correlation has made mitigating drawdowns more difficult. Currently, significant drawdown potential is indicated by high market valuations and the duration of the present bull market.
What is important when investing in hedging solutions?
In order to limit the impact of possible market drawdowns, a hedging solution should be inversely correlated with the equity market and generate positive returns during market crises. Higher levels of protection, however, always involve higher costs, which are unnecessary during bull markets. Thus, an ideal hedging strategy should avoid the bleeding of hedging costs during rising markets while outperforming the equity market during market crises. Quantitative algorithms have helped asset managers achieve this aim. Rule-based hedging strategies, such as Alvola, which dynamically switches between long and short VIX futures, have proved their hedging ability, while also offering positive absolute returns in rising markets.
Are you interested in learning more?
Contact your ISP Group structured product advisor for more information.