6 December 2021
Chart 1. MSCI World Price Index (GBP). Rebased to 100 on 31 October 1991.
It took over 10 years for markets to recover from the dotcom bubble that burst in 2000. It took less than eight months for markets to hit new highs following the Covid-19 crash.
|Summary||Similar to an insurance policy to protect against losses over a certain amount over a fixed time period||Similar to a static strategy but traded little and often so protection levels adapt continuously over time|
|Objective||Preserve value over a defined period e.g. until the upcoming actuarial valuation||A longer term approach to reducing equity market volatility over time|
|Term||Fixed – decision required to renew at expiry||Evergreen but can be switched off at any time|
|Outcome||Largely known for a given equity market move at expiry||Less certain given no defined expiry and evolving nature of strategy|
|Protection level||Fixed for the given term – risk is therefore increasing in rising markets||Evolves with markets over time|
|Governance requirements||Higher ongoing requirements due to periodic renewal or restructure||Lower ongoing governance requirements as strategy continuously renews and adapts with markets|
Chart 2. Change in the S&P 500 Price Index (USD) from 31 October 2018 with indicative protection levels for a static and dynamic equity protection strategy.
Static protection shown to be in place for 3 years at 90% of market levels at implementation on 31 October 2018. Dynamic protection implemented on a daily basis with a 1 year maturity at 90% of prevailing market levels.
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