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UBP in der Presse 08.09.2017

Hedging risk through dynamic short exposure

Hedging risk through dynamic short exposure

AGEFI Indices - Some lingering uncertainties on the markets could see investors reduce risk in their equity portfolios


While global financial markets chalked up 9% gains over the first six months of the year, a number of investors are spotlighting the high valuations of stocks along with the intrinsically increased risk of their portfolios. On top of this, some uncertainties, which include the trouble in predicting the budgetary and regulatory policies of the Trump administration, could weigh on the markets in the near future. With this in mind, being able to anticipate and manage bearish trends on the equity markets regardless of their timing and magnitude could prove to be key and ultimately improve the risk/return profile of a global portfolio.

It is possible to offer investors a low-cost and active investment solution aiming at increasing the protection of their equity pocket in the event of a market downturn. This is based on a combination of two strategies that specifically respond to two types of risk. The first of these is a core Short Bias strategy, which seeks protection against standard market corrections of less than 10% through short and long future and option positions among plain-vanilla, highly liquid and listed indices such as the S&P 500 and the Euro Stoxx 50.

The second is a satellite strategy called Tail Risk, which aims to protect investors against less frequent but more extreme market corrections, i.e. those in the order of 10% or more, through long exposure to volatility futures such as the VIX and the VStoxx. This strategy seeks to take advantage of the positive correlation between the magnitude of a market correction and the volatility peak associated with it, hence the need for long exposure to volatility futures.

A dynamic short exposure solution suits every type of investor, as it fits into a risk management approach. In addition to this, it remains flexible, depending on the level of protection sought, whether this is low or high.
 

Figure 1: Dynamic short exposure enables dynamic adjustment of the net exposure of an equity portfolio

Dynamic short exposure enables dynamic adjustment of the net exposure of an equity portfolio
It goes without saying that a dynamic short exposure solution must also demonstrate its added value in terms of performance, as it seeks out positive alpha over static benchmark indexes. Figure 2 shows the idea of risk reduction against return. So, starting with the same initial portfolio, risk reduction implemented by adding a dynamically managed short exposure (option 2) will target an improvement in the portfolio’s risk/return profile, unlike one which simply reduces its equity exposure (option 1), all things being equal in terms of final exposure level (in this example, 75%).

Figure 2: Dynamic short exposure enables an equity portfolio’s risk/return profile to be improved

Dynamic short exposure enables an equity portfolio’s risk/return profile to be improved

More about UBP's alternative expertise

Marion Olivier 150 x 150.jpg

Olivier Marion
Senior Investment Specialist – Alternatives

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Meistgelesene News

Market insight 26.04.2018

The ECB stays cautious due to low and fragile core inflation

The ECB has not changed its current strategy

  • The ECB has recognized that the slowdown in Q1 was broad based, but it was mainly due to temporary factors; so the ECB remains confident on growth.
  • The inflation  should finally converge at/or slightly below 2%, but the ECB has noticed that the core inflation has not shown convincing signals of being on an upward trend; for this reason, a still large monetary accommodation still looks justified according to the ECB.
  • According to M. Draghi, there was no discussion on monetary policy; no pre-commitment of any change in the ECB’s communication in June.
  • As core inflation is not a firm trend, the ECB will take some time before officially shifting its communication and its strategy. This increases the probability of a change in communication only in the next July meeting and favors a smooth end of the QE in Q4-18.

 

US: Initial jobless claims (Apr.21): 209k vs 230k expected (prior: 233k revised from 232k)

  • Continuing claims: 1837 k after 1866 k.

 

US: Durable goods orders (March): 2.6% m/m vs 1.6% expected (prior: 3.5% revised from 3%)

  • Orders have been boosted by civil aircrafts (44% m/m).
  • Orders for capital goods non-defense ex aircraft (core orders) were down by 0.1% m/m after 0.9% m/m the prior month. By sector, the picture was mixed: a rebound in computers, but falling orders for machinery and flat in equipment.
  • Shipments were up by 0.3% m/m (-0.7% m/m for core orders); inventories were up by 0.1% m/m (+0.3% m/m for core orders).

 

US: Wholesale inventories (March): 0.5% m/m vs 0.7% expected (prior: 1%)

  • Inventories of durable goods were up close to 1% m/m.

 

Germany: GFK consumer confidence (May): 10.8 as expected (prior: 10.9)

  • Some cautiousness on future activity and income, despite good fundamentals.

 

Spain: Unemployment rate (Q1-18): 16.74% vs 16.45% expected (prior: 16.55%)

  • Unemployed has surprisingly decreased by close to 2% over the quarter; this could be viewed as a pause in a still positive trend.
Market insight 25.04.2018

France: consumer confidence under stabilization

France: Consumer confidence (Apr.): 101 vs 100 expected (prior: 100)

  • Sentiment is less negative on personal situation and on standard of living; in details, prices, and unemployment to a lesser extent, were sources of rising concerns.
  • In absolute terms, the index remained well above the levels reached before the financial crisis, pointing towards good fundamentals for households. The index could stabilize around these current levels, which stayed below levels reached in Q4-17.

 

Spain: PPI (March): -0.9% m/m (prior: 0% revised from 0.1%)

  • Prices were up by 1.3% y/y after 1.2% y/y past month. Energy prices have fallen by 3% m/m.

 

Poland: Unemployment rate (March): 6.6% vs 6.5% expected (prior: 6.8%)

  • The decrease of unemployed has accelerated: -35 k after -7 k past month.

 

Brazil: Current account (March): 798 M$ vs -100 M$ expected (prior: 290 M$ revised from 283 M$)

  • Current account has jumped into a surplus for the second month; FDI has also jumped from USD 4.7 bn to USD 6.5 bn over the month.

 

Turkey: Central bank has increased liquidity lending rate from 12.75% to 13.50%.

  • Repo rate was unchanged at 8%, overnight lending rate unchanged at 9.25% and overnight borrowing rate unchanged at 7.25%.
  • In its statement, central bank mentioned that it wanted to implement some tightening in order to preserve price stability, as inflation and expectations have increased.
Market insight 24.04.2018

Richmond Fed manufacturing fell sharply in April, disappointing German IFO survey

US: Richmond Fed manufacturing (Apr): -3 vs 16 expected (prior: 15)

  • The index fell sharply in April for the second consecutive month.
  • The underlying composition was generally weak, with sharp declines in the shipments and new orders components.

 

US: Consumer confidence (CB) (Apr): 128.7 vs 126 expected (prior: 127 revised from 127.7)

  • The improvement in confidence was spread evenly across the present situation and expectations indices.

 

US: New home sales (Mar): 694k vs 630k expected (prior: 667k revised from 618k)

  • On a m/m basis: 4% vs 1.9% expected (prior: 3.6% revised from -0.6%)
  • By region, March sales increased in the West (+28.3%), South (+0.8%) but declined in the Northeast (-54.8%) and Midwest (-2.4%). Inventory available on the market edged down to 5.2 months of available supply, towards the lower end of its 12-month range.

 

US: Housing prices (FFHA) (Feb): 0.6% q/q as expected (prior: 0.9% revised from 0.8%)

 

Germany: IFO (Apr): 102.1 vs 102.8 expected (prior: 103.3 revised from 103.2)

  • Expectations: 98.7 vs 99.5 expected (prior: 100 revised from 103.2)
  • Current assessment: 105.7 vs 106 expected (prior: 106.6 revised from 106.5)
  • The headline decline was driven by a drop in expectations. From a sector perspective, sentiment in manufacturing eased further from high levels, while construction and retail sentiment improved slightly.
  • Note that there have been methodological changes to the survey this month, which in theory should make it a better guide to German GDP growth.

 

France: Business confidence (Apr): 108 as expected (prior: 109)

  • Manufacturing: 109 vs 110 expected (prior: 110 revised from 111)

Auch lesenswert

Market insight 26.04.2018

The ECB stays cautious due to low and fragile core inflation

The ECB has not changed its current strategy

  • The ECB has recognized that the slowdown in Q1 was broad based, but it was mainly due to temporary factors; so the ECB remains confident on growth.
  • The inflation  should finally converge at/or slightly below 2%, but the ECB has noticed that the core inflation has not shown convincing signals of being on an upward trend; for this reason, a still large monetary accommodation still looks justified according to the ECB.
  • According to M. Draghi, there was no discussion on monetary policy; no pre-commitment of any change in the ECB’s communication in June.
  • As core inflation is not a firm trend, the ECB will take some time before officially shifting its communication and its strategy. This increases the probability of a change in communication only in the next July meeting and favors a smooth end of the QE in Q4-18.

 

US: Initial jobless claims (Apr.21): 209k vs 230k expected (prior: 233k revised from 232k)

  • Continuing claims: 1837 k after 1866 k.

 

US: Durable goods orders (March): 2.6% m/m vs 1.6% expected (prior: 3.5% revised from 3%)

  • Orders have been boosted by civil aircrafts (44% m/m).
  • Orders for capital goods non-defense ex aircraft (core orders) were down by 0.1% m/m after 0.9% m/m the prior month. By sector, the picture was mixed: a rebound in computers, but falling orders for machinery and flat in equipment.
  • Shipments were up by 0.3% m/m (-0.7% m/m for core orders); inventories were up by 0.1% m/m (+0.3% m/m for core orders).

 

US: Wholesale inventories (March): 0.5% m/m vs 0.7% expected (prior: 1%)

  • Inventories of durable goods were up close to 1% m/m.

 

Germany: GFK consumer confidence (May): 10.8 as expected (prior: 10.9)

  • Some cautiousness on future activity and income, despite good fundamentals.

 

Spain: Unemployment rate (Q1-18): 16.74% vs 16.45% expected (prior: 16.55%)

  • Unemployed has surprisingly decreased by close to 2% over the quarter; this could be viewed as a pause in a still positive trend.
Market insight 25.04.2018

France: consumer confidence under stabilization

France: Consumer confidence (Apr.): 101 vs 100 expected (prior: 100)

  • Sentiment is less negative on personal situation and on standard of living; in details, prices, and unemployment to a lesser extent, were sources of rising concerns.
  • In absolute terms, the index remained well above the levels reached before the financial crisis, pointing towards good fundamentals for households. The index could stabilize around these current levels, which stayed below levels reached in Q4-17.

 

Spain: PPI (March): -0.9% m/m (prior: 0% revised from 0.1%)

  • Prices were up by 1.3% y/y after 1.2% y/y past month. Energy prices have fallen by 3% m/m.

 

Poland: Unemployment rate (March): 6.6% vs 6.5% expected (prior: 6.8%)

  • The decrease of unemployed has accelerated: -35 k after -7 k past month.

 

Brazil: Current account (March): 798 M$ vs -100 M$ expected (prior: 290 M$ revised from 283 M$)

  • Current account has jumped into a surplus for the second month; FDI has also jumped from USD 4.7 bn to USD 6.5 bn over the month.

 

Turkey: Central bank has increased liquidity lending rate from 12.75% to 13.50%.

  • Repo rate was unchanged at 8%, overnight lending rate unchanged at 9.25% and overnight borrowing rate unchanged at 7.25%.
  • In its statement, central bank mentioned that it wanted to implement some tightening in order to preserve price stability, as inflation and expectations have increased.
Market insight 24.04.2018

Richmond Fed manufacturing fell sharply in April, disappointing German IFO survey

US: Richmond Fed manufacturing (Apr): -3 vs 16 expected (prior: 15)

  • The index fell sharply in April for the second consecutive month.
  • The underlying composition was generally weak, with sharp declines in the shipments and new orders components.

 

US: Consumer confidence (CB) (Apr): 128.7 vs 126 expected (prior: 127 revised from 127.7)

  • The improvement in confidence was spread evenly across the present situation and expectations indices.

 

US: New home sales (Mar): 694k vs 630k expected (prior: 667k revised from 618k)

  • On a m/m basis: 4% vs 1.9% expected (prior: 3.6% revised from -0.6%)
  • By region, March sales increased in the West (+28.3%), South (+0.8%) but declined in the Northeast (-54.8%) and Midwest (-2.4%). Inventory available on the market edged down to 5.2 months of available supply, towards the lower end of its 12-month range.

 

US: Housing prices (FFHA) (Feb): 0.6% q/q as expected (prior: 0.9% revised from 0.8%)

 

Germany: IFO (Apr): 102.1 vs 102.8 expected (prior: 103.3 revised from 103.2)

  • Expectations: 98.7 vs 99.5 expected (prior: 100 revised from 103.2)
  • Current assessment: 105.7 vs 106 expected (prior: 106.6 revised from 106.5)
  • The headline decline was driven by a drop in expectations. From a sector perspective, sentiment in manufacturing eased further from high levels, while construction and retail sentiment improved slightly.
  • Note that there have been methodological changes to the survey this month, which in theory should make it a better guide to German GDP growth.

 

France: Business confidence (Apr): 108 as expected (prior: 109)

  • Manufacturing: 109 vs 110 expected (prior: 110 revised from 111)