Market risk is the possibility of an investor experiencing losses
due to factors that affect the overall performance of the financial
markets in which he or she is involved.
Market risk, also called ‘systematic risk,’ cannot be eliminated
through diversification, though it can be hedged against.
So what exactly is hedged equity? Hedged equity simply involves buying equity in some form, an underlying investment, and then securing a hedge to offset losses connected to market risk (i.e. the whole market sells off or the economy slows due to unpredictable events, like COVID-19 or a mortgage crisis).
There are many ways to hedge equity: options contracts, futures contracts, and investments in other assets believed to behave in a non-correlated manner in relation to the underlying investment (like gold or bonds) during various marketing conditions. Put options, for example, are inversely correlated to the underlying investment, and therefore may serve as an effective hedge.
While hedging is often considered a short period tactic, long-term investors may want to consider the benefits of a long-term hedging strategy.
After all, to achieve long-term goals investors need to remain invested for growth (known as managing right tail risk), while mitigating risk of major losses (managing left tail risk). Our approach to hedged equity provides a hedge for both tails.
Our Defined Risk Strategy is a distinct approach to hedged equity that remains always invested and always hedged.
We apply a unique hedging process that actively manages longer-term put options to directly address market risk, seeking to provide long-term investors with a smoother investment experience.
Since 1997, our Defined Risk approach to hedged equity has redefined the risk/return profile of long-term equity investing.