Illustrative Purposes Only

What is Equity Downside Protection?

Equity downside protection is an investment solution that helps clients remain invested in equities to benefit from potential market gains, while reducing the potential impact of equity market losses.

These solutions typically involve the use of derivative contracts, which can conceptually be thought of as a form of equity portfolio insurance.

The chart represents the shape of the payoff of a simple put option. As illustrated, the option will provide protection when the equity market falls more than 10% but will ‘cost’ 4.5% of the equity return.

Why clients protect equities?

Clients typically want to implement equity downside protection for one of two reasons:

  • Tactical: an expectation that markets will continue to rise over the long-term but with an increased likelihood of a market correction over the short-term (for example concerns over stretched equity valuations)
  • Strategic: a need for long-term exposure to the equity markets for return generation, but with a lower tolerance for the potential downside losses (for example a pension scheme with a weaker sponsor covenant)

SECOR’s solutions

Equity downside protection can be expensive, so we have developed a broad set of cost-reduction tools to actively manage the solution, allowing us to work with clients to build a strategy that meets their needs.  We also offer our full discretion SECOR Tail Risk Hedging strategy which gives SECOR the discretion to use the entire toolkit against a well-defined put-based benchmark.

Our strategies fall into three categories:

  • Option strategies: Our options strategies comprise protective puts and income generating options sales to provide a certain level of equity protection at a reduced cost
  • Non-option strategies: Our non-options strategies comprise systematic strategies, dynamic short futures, and short-biased relative value trades to provide alpha generating opportunities that include elements of downside protection
  • SECOR Tail Risk Hedging (TRH): Our full discretion solution allows SECOR to combine option and non-option strategies within well-defined investment guidelines and subject to tracking error limits. We benchmark this strategy against a put-based benchmark allowing clients to hold us accountable.

SECOR Tail Risk Hedging Strategy

SECOR’s full discretion solution combines option and non-option strategies overlaid with a common-sense approach to offer a comprehensive solution that targets outperformance against a put option benchmark. The chart provides an illustrative example of the protection profile we target with our full discretion Tail Risk Hedging (TRH) strategy.

SECOR’s TRH Strategy achieves a unique cost and protection profile providing protection when clients need it most, but not excessively impairing performance when equity markets rally.

Why SECOR?

  • One of the leading providers of equity downside risk solutions to institutional investors
  • An experienced investment team with decades of overlay, hedging and derivatives management experience
  • A full arsenal of hedging tools and risk controls
  • Bespoke solutions that combine multiple hedges into a cohesive strategy
  • Strict governance and measurement
  • We have a performance track record of providing protection during historical significant market drawdowns

Get in touch to learn more!