A Customized Right Tail hedge is a capital-efficient way to attempt to maximize portfolio upside capture with limited downside risk and makes sense in the current market environment perhaps more than ever:

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• Substantial fiscal stimulus is expected to drive equity markets higher.

• Investors that liquidated equity exposure in the recent crash will look to re-enter the market.

• Draw-ups in markets are at least as numerous and severe as drawdowns

• Corporate buybacks are attractive with the low cost of financing and pause in credit spread widening.

• Cross-market demand for convexity will likely continue as managers in other asset classes experience slower rebounds than the equity market.

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This strategy enables institutional investors to take advantage of market upswings and avoid the drag and downside volatility that comes with traditional 60/40 equity/fixed income ‘diversified’ portfolios.

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This strategy enables institutional investors to take advantage of market upswings and avoid the drag and downside volatility that comes with traditional 60/40 equity/fixed income ‘diversified’ portfolios.

 

The key is in the customization for each institution:

• Implementation involves a highly hands-on overlay on portfolio beta targets using a basket of liquid call options across asset classes.

• Focus on options markets that are deep, liquid, and sensitive to systemic macro events.

• Designed to be accretive on portfolio objectives of investment committees

• Extremely liquid and cost-efficient.

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