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For complaints, use another form. Study lib. Upload document Create flashcards. Documents Last activity. Flashcards Last activity. Add to Add to collection s Add to saved. Negative real interest rates on year German government bonds will not contribute much to the return requirements of institutional investors. How can investors participate in the long term return opportunities provided by risky investments while effectively limiting their risk of loss in times of crisis?
Capital protection strategies, including CPPI as the most basic form, offer interesting approaches to this issue. The basic principle of capital protection The objective of capital protection concepts is to allow investors to participate in the opportunities of promising but risky investments while limiting the risk of loss during Dr.
Before the takeover by Allianz Global Investors, she spent 8 years in portfolio management at cominvest as Team Leader for Structured Products. This concept is particularly interesting for asset classes that are exposed to significant market price risks. The objective is an asymmetric distribution of returns — negative returns or returns under a threshold previously agreed with the investor are to be avoided, investor participation in positive returns should be maximized.
An obvious way to hedge a portfolio is to purchase put options on suitable underlyings. A dynamic hedging strategy like CPPI goes down another route — no puts are bought, protection is secured instead by rule-based shifting the portfolio in response to market developments.
Unlike a hedge constructed using options, a dynamic protection strategy does not incur any explicit hedging costs without regards to administrative costs. Certainly, dynamic protection strategies cannot escape the basic laws governing the financial markets.
Ambitious protection levels come at the price of lower participation in positive markets. This somewhat reduced return potential is a kind of implicit insurance premium. Another reason dynamic strategies are attractive is that they are highly flexible: they can help to protect a wide variety of portfolio allocations. This does not apply to the OBPI alternative: exchange-traded options are only available for standard indices; resorting instead to Over-The-Counter OTC options poses problems such as counterparty risk and illiquidity.
The dynamic protection concept In addition to the permissible investment universe, the investor determines the protection level and the point in time when this level shall be reached protection horizon.
The portfolio managers adjust this ratio of risky versus safe assets on a daily basis if needed so that the value of the portfolio does not fall below the protection level at the protection horizon. This clearly demonstrates that the basic form of CPPI is a purely pro-cyclical strategy. The main parameters of the strategy are: 6 1. The protection level and the protection horizon, i. This parameter largely determines the quality confidence of the protection approach.
Modern statistical techniques, such as extreme value theory, can be used to determine extreme price risks. These techniques can provide much more realistic estimates of the downside risks in the financial markets than, for example, normal distributions. An additional requirement is that the securities shall not be exposed to either liquidity or credit risks. Improvements Improving on the basic CPPI framework, several proprietary allocation strategies have been developed, that are used for mandates with soft or hard protection,.
In these strategies, the familiar pro-cyclical elements of CPPI are often supplemented by anti-cyclical components.
This allows, for example, partial profit-taking in highly overheated markets. To remain flexible for re-entry into the market even after strong declines, portfolio managers can hold back part of the risk budget, which is especially important for longer protection horizons.
These reserved parts of the risk budget are typically released at a later date to enable better participation in an eventual recovery. Furthermore, these improved and more flexible strategies also allow — unlike CPPI — an active management of risky assets e. European, US, or emerging markets equities, etc. Capital protection approaches cannot prevent financial crises and bubbles, but they help to ensure that portfolios generate more stable and predict- able returns during such markets.
Just as important for the overall investment strategy is that these dynamic allocation solutions support investors with the intention to leap more confidently into higher yielding asset classes, particularly during the current market environment. Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested.
Past performance is not indicative of future performance. In making investment decisions, investors should not rely solely onthis material but should seek independent professional advice. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or willful misconduct.
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The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This is a marketing communication. This material has not been reviewed by any regulatory authorities, and is published for information only, and where used in mainland China, only as supporting materials to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.
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