Swan believes it has a unique solution that can maximize return and minimize risk of emerging markets. It is the same strategy that has been successfully applied to U.S. Large Cap equities for 20 years: the Defined Risk Strategy (DRS). The DRS was built around the idea that the biggest risk to an investor’s wealth is the large scale, systematic sell-offs that occasionally befell the markets.
Redefining Emerging Markets Investing
The DRS directly hedges against bear markets via long-term put options. Not only are the put options designed to protect during a bear market, the puts are also designed to be a source of capital for re-investing into the markets when the markets are trading at a discount after a large bear market sell-off.
By re-hedging and re-investing after a bear market sell-off, Swan believes the DRS is superior to market timing. One of Swan’s core beliefs is that it is difficult, if not impossible to call the tops and bottoms of markets and to build a successful long-term strategy by timing the markets. This truth is especially relevant in emerging markets. As seen in the previous graph, emerging markets are noted not only for their steep declines but also for their very sharp rallies. In other words, if your timing is slightly off and you miss the rally, you miss big.
Below is a table showing the returns of emerging markets coming off the bottom. The first two columns specify a market sell off and the date of when the rally started. The middle column shows the 12-month return if someone had perfect foresight and bought at the bottom of the market. The fourth column is the impact of missing the first month of the rally and the final column shows the 12-month returns if the first three months of the rally are missed.
We believe the above information simply reinforces the importance of Swan’s motto: “Always Invested, Always Hedged.”
We also believe that our approach to managing risk in emerging markets is completely unique. By hedging against bear markets and seeking to generate cash flow through option premium, we believe we have fundamentally changed the risk/return profile of emerging markets.
Click to find out more about the Defined Risk Strategy applied to Emerging Markets, or call 970.382.8901.
Updated: August 24, 2017