Risk and Portfolio Construction

Downside Protection - Methods and Horizons

15 Top Papers on Portfolio Protection

With investment yields at ultra-low levels and quantitative tightening on the horizon, there is increased incentive for investors to consider the options for downside protection.

This is an area where there is no one-size-fits-all option. The best approach depends very much on investor objectives, liabilities and time horizon. Below, we have selected a range of papers, each applicable to different situations, explaining nuances and providing valuable insights.

Savvy Investor

Risk & Reward: The Theory and Practice of Portfolio Insurance (Invesco, 2017)
(This paper is not accessible in certain geographies)
To achieve their goals, many investors are allocating towards more risky assets. But these investors can quickly find themselves in a tight spot if the risk budget is not expanded accordingly. Portfolio insurance can help here, but which strategies are the most effective?

Embracing Downside Risk (AQR Capital Management, 2017)
Published in the Journal of Alternative Investments, the three authors from AQR Capital Management examine equity index option pricing. They conclude that most of the empirical equity risk premium relates to compensation for bearing downside risk, making downside risk something to be embraced.

A Framework for Institutional Portfolio Construction (Vanguard, 2016)
Institutional investors typically pursue one of four investment goals: absolute return, liability-driven investment, total return or principal protection. This paper considers which are the best for investors building their portfolio.

Managing equity portfolio volatility by harnessing the VRP (Eaton Vance, 2017)
After eight years of stock market gains, option-based strategies that seek to harness the Volatility Risk Premium have grown in popularity. This paper explores further.

Integrated risk management for DB pension schemes (IFoA, Apr 2017)
This 70-page paper provides some practical hints and tips, through four case studies, for those developing Integrated Risk Management plans for UK defined benefit schemes.

Fiscal Policy, Inflation and the Role of Real Assets (QMA, Mar 2017)
This paper examines makes the case for investing in real assets. It also discusses historic returns during normal and above-average periods of inflation.

Do bonds diversify equity risk? (Wellington Management, Feb 2017)
The authors of this paper argue that investors seeking diversification to equity risk should consider alternative strategies as complements to, or even substitutes for, traditional government bond allocations.

CPPI: Constant proportion portfolio insurance (Allianz Global Investors, 2015)
This May 2015 paper from Allianz Global Investors explain the theory of CPPI, a technique used to manage shortfall risk in a portfolio.

Extreme Risk, Tail Risk and Downside Protection (The Savvy Blog, Apr 2016)
This selection of white papers (curated by the Savvy Investor research team) covers a range of important topics: predicting volatility, dynamic downside protection, tail risk of smart beta portfolios, and more.

The Divergence of High- and Low-Frequency estimation (State Street, 2015)
This paper is a collaborative effort between State Street Global Exchange and Windham Capital Management. It provides findings that are important to asset allocators looking at long-term asset allocation goals.

LDI - Managing Surplus Volatility by Reducing Drawdown Risk (QMA, 2016)
This paper by QMA recommends that plan sponsors prioritize the trade-off between surplus volatility and funded status, and examine their growth assets for ways to reduce surplus volatility.

The Upside of Less Downside: How Defense Wins in Equities (AB, 2016)
Soaring stock prices thrill investors, but it's the disciplined, less glamorous efforts to not lose money that build lasting wealth. It's possible to get downside protection and still beat the market over time. This paper explains how.

The Free Lunch: Decoupling Diversification from Risk (Salient, 2016)
This paper discusses why considering diversification and risk independently may help investors build more efficient portfolios.

A Framework To Evaluate Pension De-Risking Strategies
Produced by EY, this white paper establishes a shared framework for the examination of derisking strategies that are available in today’s market.

A Performance Analysis of Risk Parity (Lazard, 2016)
The authors of this paper examine whether or not risk parity can outperform a buy and hold, asset-based, equal-weighted allocation. They seek to identify the key factors that drive the performance of risk parity.