After the financial “contagion” of late 2008, when virtually every asset class and sector of the market crashed at once, regardless of sector, and diversification was rendered temporarily ineffective, we felt strongly about finding an appropriate safety net in order to be prepared if and when this extremely rare phenomenon were to ever happen again.  We see it as an inherent part of our fiduciary duty to our clients.

In response, we created three stringent criteria our safety net.  They are:

  • Sudden appreciation in severe market downturns—and no “give-back” when markets recover, as they have always done
  • Very low cost, i.e., we do not wish to sacrifice upside potential
  • Minimal disruption to the portfolio—no dismantling of what works in the vast majority of markets in pursuit of protection against very rare events. 

Solutions that meet all three of these requirements are very difficult to come by.  Most approaches in the marketplace such as puts, collars, and so-called “Black Swan Funds,” for example, fail one or more or our criteria. 

For example, not only are put options expensive, but once the market recovers, they lose value.  And collars defray direct cost, but they do so by giving up some potential future gains — which is the last thing you want to do when recovering from a market decline.  These approaches violate both the first and second criteria.  In addition, “black swan funds,” currently being offered by some firms, violate the third.  By essentially assuming that severe bear markets are the norm, they penalize you in markets that are much more prevalent. 

Working dillegently after 2008 we implemented our own version of portfolio protection for our clients.

The result?  A safety net for those rare black-swan events to handle those risks that asset allocation, rebalancing and sector rotation cannot, providing effective catastrophic risk protection for your portfolio.  We continue to search for even more effective ways to protect our clients’ portfolios from contagion and other negative, unforeseen market events.

Learn more about portfolio protection with ::

10 minute podcast
50 minute webinar
Client Bulletin and technical supplement – February 2010
Update on Portfolio Protection March 21, 2011