Typically, global investment managers deploy two techniques to protect stock portfolios against downside risk in the markets. The first is hedging with futures and options contracts, and the second is holding large cash positions.
If you get the timing right, raising cash to protect against a market drawdown can look brilliant. But if you’re going to time the market, you’ve got to be right two times: When you sell and when you buy back in. Whipsawing markets that dramatically shift between favoring either risk-on or risk-off stances increase the potential to be caught out of position. In such environments, holding either too much or too little in cash can create a substantial lag vs. a traditional benchmark that is always 100% invested in equities. Missing out on just a few of the market’s best days can have a material impact on your portfolio’s long-term value.
The use of futures and options contracts can avoid the risks inherent in timing the market. But such contracts carry heavy transaction costs and often require the use of margin borrowing. The costs of maintaining a desired position are complex to calculate and may spike in times of market stress. For most investors, this approach is highly inappropriate and can actually increase potential risks when the intent is to reduce them.
There is a better way to manage risk: Alter the beta of the underlying constituents that make up the portfolio. And that’s the approach the investment team at Polaris is taking.
We’re deploying an investment management technique that is backed by research to help protect and advance clients’ assets in both volatile and growing markets—creating a synthetic cash position by manipulating portfolio beta. We have employed this risk-adjusted approach to portfolio management across various market cycles and market conditions in our Polaris Focused Strategies.