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Defensive Equity Strategies

Low Vol, Absolute Return, and other Defensive Strategies

It has been said that the best offense is a good defense, but is it better to opt for a 5-3-2 or a 4-5-1 formation?   There are a wide variety of investment strategies that are referred to as being defensive - low volatility, absolute return, currency hedging, and options overlays are just a few. 

In the papers listed below, FTSE Russell discusses the pros and cons of three specific defensive strategies, S&P Dow Jones examines defensive indices, and AllianceBernstein looks at upside/downside capture management in the Australian equity market.  

defensive equity

Implementation considerations for defensive strategies (FTSE Russell, 2019)

FTSE Russell examines the differences and commonalities that exist within three defensive investment approaches: low volatility, minimum variance, and equal risk contribution.

The Upside of Less Downside: How Defense Wins in Equities (AB, 2016)

While ballooning stock prices may excite equity investors, it's really the disciplined efforts undertaken to not lose money that wind up building lasting wealth. But how can downside protection still generate excess returns over time?

Is Your Absolute Return Strategy the Right Fit? (Intech Investments, Aug 2018)

For compliance reasons, this paper is only accessible in certain geographies

Intech introduces a framework for evaluating absolute return strategies that focuses upon how effective they are at reducing equity volatility.

The complete downside protection toolkit (Fidelity International, Feb 2018)

For compliance reasons, this paper is only accessible in certain geographies

Each downside protection tool has its own particular use when it comes to assisting investors in managing risks. Identifying the pros and cons of each tool is critical to deciding which is best for safeguarding an investor's portfolio.

Defense Beyond Bonds: Defensive Strategy Indices (S&P Dow Jones Indices, 2018)

S&P Dow Jones Indices introduce defensive indices that have outperformed the S&P 500 with less risk, as well as other factor related long-short strategies that also lie within the defensive toolbox.

Ensemble Active Management: Taming Toxic Tails (Enterprising Investor blog, Jan 2019)

This lengthy blog post is on Ensemble Methods that utilise artificial intelligence to combine the alpha engine of a 'best idea' portfolio with a beta anchor in an efficient manner that preserves alpha and reduces the risk of toxic tails.

Managing downside risk in institutional investment portfolios (Russell Investments, May 2018)

For compliance reasons, this paper is only accessible in the United States

Russell Investments discusses potential solutions for managing downside risk in investment portfolios via a risk-centric foundation built upon the analogy of preventative medicine, minor surgery, and catastrophic healthcare coverage.

The Upside of Less Downside: How Defence Can Win In Australian Equities (AB, 2017)

The authors describe how carefully managing upside/downside capture can lead to a smoother ride, while still achieving equity market-like returns.

Low-Volatility Equity Portfolios: Helping DC Plan Participants Meet Their Retirement Goals (Intech)

For compliance reasons, this paper is only accessible in certain geographies

Low volatility equity strategies may offer some amount of downside protection during periods of market stress, without sacrificing much in the way of expected returns for DC plan participants.

Incorporating low volatility equity into a strategic allocation (BMO GAM, Jan 2019)

In this paper, the authors take a closer look at a strategic allocation to low volatility equity strategies, how these allocations should be funded, and how they fit within a broader portfolio context.

Some Like It Hedged (CFA Institute Research Foundation, 2018)

CFA Institute explores whether investors should hedge currency exposures within institutional portfolios. This hedging can also take place in the form of a static, passive hedge of a certain portion of risk, or a more dynamic, active hedging policy.

The Currency-Hedging Dilemma (Morningstar, 2018)

This Morningstar paper covers currency risk, exchange rate fluctuations, and the costs of hedging, with an aim to provide investors with a framework for better understanding the currency hedging decision.

Option-Based Equity Strategies: An introduction (Meketa Investment Group, 2018)

Meketa Investment Group presents a primer on option-based equity strategies for long-only equity investors, including collars, protective puts, covered calls, and several others.

Embracing Downside Risk (AQR Capital Management, 2017)

In this contrarian perspective, the authors review equity index options, coming away with the opinion that because most of the ERP relates to compensation for taking on downside risk, downside risk is actually something that should be embraced.

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