Why consider risk managed investing?
Risk managed investing has protection always in place (dynamically managed as per global best practise), returns designed to increase with market volatility, and regular income through the complete investment cycle.
Portfolio construction can reduce undesirable volatility and large negative stocks through including diversified non correlated assets.
- Many portfolios are no longer diversified non correlated as a result of zero bound or negative interest rates
- Stock markets are ‘late cycle’ and expensive by most valuation metrics – major corrections typically happen over 6-12 months
- Historical drawdown for equities with traditional balance and diversified portfolio did not protect as well as expected
Proprietary systems identify volatility skews for lowest cost protection within defined risk parameter always in place.
Further background is provided in our recent Inside Network interview.
The Gyrostat Risk Managed Equity Fund offers five unit classes
Each Class has differing risk-return characteristics but all Classes are based on the risk managed approach developed by Gyrostat Capital and is backed by a Class specific pool of assets and liabilities held on a segregated basis.
Portfolio allocation: Gyrostat Risk Managed Class offerings
* Absolute Return Income Equity Class A: Returns increase on large market falls (downside tail always in place). Income cash rate + 3% pa (min)
** Leveraged Absolute Return Income Equity Class B: Income cash rate + 6% pa (minimum) protect on large market falls
^ Risk Managed Class C, D, E: Protection mitigates losses on major market falls Vs class specific index
The investment strategy and other key characteristics for each Class of Units are set out below:
Our general observations are:
- With protection always in place a ‘one off’ sell-off event would be beneficial for the Fund
- Increasing levels of volatility are beneficial for the Fund, as this creates the opportunity to more actively manage the ‘options overlay’ and lower the cost of protection
- There is also a static cost for those periods of lower volatility where the options do not trade. The cost of protection is higher during these periods
Asset Consultants and Research
"KK Asset Consulting has developed a solid level of confidence in the manager’s ability to successfully execute on their investment strategy. They have a long history, spanning more than 10 years, and have performed as expected during the various market conditions, in particular volatile markets, where the Fund has protected capital and delivered solid absolute returns. This is the environment where the Fund is expected to perform, and has been the case, providing diversification benefits to long-only equity funds."
Source: KK Asset Consulting Pty Ltd Investment Review February 2021
What is “best practice” for dynamic risk managed investing?
We have reviewed five global papers on dynamic risk managed protection overlays and two best practice key themes emerge:
- Structure protection between ‘core’ and ‘tail’ protection
- Use Dynamic Downside Protection, not buy and hold protection
Core protection is designed for normal market conditions and provides a positive payoff in moderate corrections.
Tail risk hedges are designed to provide significant gains during extreme market corrections.
“Dynamic downside protection … provide access to a payoff profile that has the potential to provide sufficient downside protection without removing too much upside potential.”
Source: Russell Research: Dynamic Downside Protection (March 2014) p19
How does Gyrostat implement “best practice” dynamic risk managed investing?
Gyrostat manages both “core” and “tail” dynamically – not buy and hold.
Gyrostat three step dynamic downside protection
Superimpose a 'hockey stick' pay off at all times on a share price chart, moving the protection level on market moves.
- Buy and hold blue chip shares with protection on the Stock Exchange
- Set the amount of protection to always participate in the upside with minimal capital at risk
- Re-set the protection level on market moves - if the share price rises increase the protection level, on falls reduce the protection level