Investors can make their portfolio more resilient to potential adverse scenarios by incorporating strategies designed to help limit losses while retaining participation in potential gains. This may be particularly relevant for investors with concentrated portfolios, lower tolerance for drawdowns, or near-term liquidity needs. Capital preservation approaches can strengthen portfolio resilience while allowing investors to maintain some upside exposure.
Locking in gains while retaining participation
Following strong equity-market gains, investors with concentrated positions may want to lock in some gains while retaining exposure to a further rally. Capital preservation strategies can help limit losses while maintaining participation in potential market gains, whether linked to individual stocks or broader equity indices.
Derisking while maintaining exposure
Investors with holdings that are richly valued, cyclical, or vulnerable to market shocks can consider reducing risk by diversifying across regions or using strategies designed to provide loss limitation. Capital preservation strategies can be tailored by tenors, the level of downside protection, and the participation rate, allowing investors to select an approach that reflects their objectives and risk tolerance.
Taking advantage of relatively low implied volatility
Relatively low implied volatility can make capital preservation strategies more attractive. High stock-level dispersion and low correlations, particularly in US and Eurozone markets, have helped keep index-level volatility relatively subdued. Lower implied volatility can reduce the cost of the options used in capital preservation strategies, potentially supporting greater participation in market gains.
The move higher in many governments’ shorter-dated bond yields can make zero-coupon structures cheaper, increasing the capital available for options and potentially supporting greater participation in market gains. However, investors should monitor implied volatility, as higher option prices can reduce participation rates. Investors may also need to hold these strategies to maturity to receive the contractually specified repayment, which remains subject to the issuer’s creditworthiness.
