Implementing risk-reducing strategies – March 2019
As many investors have benefited from rising equity markets over the last few years, they have often looked to protect those gains and to protect against further volatility. The recent equity market turmoil (i.e. the significant declines in Q4 2018 and recovery in January), has highlighted the importance of risk management, and more specifically, of risk-reduction programmes as part of investors’ overall investment strategy.
Equity exposure is often the largest risk in institutional investors’ portfolios. Over the last 18 months, we have seen investors adopt a variety of strategies, including the very popular option-based approaches, taking advantage of lower implied volatility and high equity index values. Doing so has allowed investors to keep to their longer term strategic objectives and maintain their long equity exposure, while protecting their portfolio from the more immediate threats posed by the market. In many cases, the term of the protection purchased was matched with a strategic milestone. For example, one might take steps to protect a pension fund against declining equity markets up until the next actuarial valuation date.
Although option-based strategies have been popular of late, there are a variety of approaches that investors can use to achieve the goal of reducing equity risk. In this article, we will discuss the main risk-reduction strategies for minimising exposure to equity markets.