Private Equity is illiquid and challenging to benchmark. Many investors use “S&P 500 +3%” in order to compare performance in the absence of an observable, investable asset. This paper describes a methodology for creating a private equity proxy or replication strategy using derivatives.
Recent bouts of volatility have made headlines and questions are being asked of one of the longest equity bull markets in history. However, strategies to protect against declines in the equity market have been steadily getting cheaper and are now at multi year lows…
Pension plan sponsors, especially those with frozen pension plans, have spent significant time deciding on the most appropriate balance between growth (return seeking/equities) and hedging (liability matching/long-term bonds) assets to meet their objectives. For most, the ideal goal is to fully fund the pension plan through a balance of investment performance, cash contributions and a rising interest rate environment while not subjecting themselves to higher than desired funded status risk.
As the bull market in US equities approaches its 9 year anniversary we look at how to protect against market declines while retaining equity upside exposure.
Pension plans typically de-risk by buying liability matching bonds and selling equities. Although this is a perfectly valid approach, it results in a direct tradeoff between the desire to reduce funded status volatility versus maintaining higher expected returns. Derivatives, however, provide plan fiduciaries with additional flexibility versus simply allocating between these two asset types. A derivative strategy we call ‘Synthetic Equity’ can be used by pension plans to maintain expected returns and retain equity exposure, yet still reduce funding level volatility.
One of the biggest stories since the November 8 election is the increase in US interest rates for bonds with maturities of 10 years or more. Investors, especially those with long-term liabilities such as pension plan sponsors, are rightly very interested in where these interest rates are likely to head from here…
Investing in equities, like driving a car, comes with inherent risk. Managing this risk can be done through asset allocation and also through the use of customized equity hedging, which we call Structured Equity.
Equity markets will always be uncertain, but the range of potential outcomes both to the upside and the downside has significantly increased with the prospect of new economic policies under the Trump administration.