Nov

23

Today I attended a lunch presentation with pension funds as the target audience. They defined risk as volatility and wanted reduced risk while maintaining much of the return. It was said that buying puts reduced return too much for most fund managers. The strategy presented was to reduce equity exposure from 100% to 50% and invest 50% in a low risk asset (short term bonds), at the same time sell both OTM calls and puts. They presented a back test of 10 years where the strategy outperformed index slightly while having a lower volatility (they outperformed during the 2008 crash and vol looked to be lower all along). I'd think they expose themselves tail risk by selling OTM puts, so was surprised they outperformed during the GFC and that they came out ahead. I still think they make it 'look' good during 'normal' markets but will get killed performance wise during sufficiently high upside and downside volatility– so I really think it is somewhat of an intellectual fraud to call this a 'low risk equity exposure' for pension funds.


Comments

Name

Email

Website

Speak your mind

1 Comment so far

  1. Andre on November 24, 2016 10:19 am

    What isn’t a fraud at these types of presentations?

Archives

Resources & Links

Search