Many investors are considering when and how much equity risk to take off the table. A particular challenge in the current environment stems from the low interest rate regime – a reallocation into fixed income offers the prospect of low or possibly negative returns and reduced effectiveness as a hedge to equities. We believe holding an equity allocation with an options overlay seeking downside protection may deliver the desired "smoother ride" while largely maintaining return expectations. In this way, an investor may improve confidence in the face of anticipated volatility through reshaping a portfolio's expected return distribution with a hedging program that is both effective and cost-efficient. Read more.

Investors are always in search of diversifying securities and strategies to assist in downside risk management. We consider six popular diversifying securities, i.e. Gold, Swiss Franc, Japanese Yen, Bond Futures, S&P 500 80% strike Put Options, and Trend Following strategies in this paper. Using fifty years of data, we demonstrate that a portfolio approach to diversification strategies results in more robust outcomes when combined with a portfolio which has large equity exposure. While each of the individual securities can be more or less beneficial in specific periods and environments, we conclude that a simple portfolio approach to diversification, whether optimized or not, allows investors to robustly manage risk while not being overly concentrated.