Portfolio protection strategies

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Portfolio protection strategies - exploiting return opportunities in capital markets with active risk management

A high degree of diversification forms a good foundation but should be complemented by stronger safety mechanisms. With our value protection solutions, we offer multi-asset investors the opportunity to participate in the long-term capital market development whilst achieving pre-defined risk targets. Our value protection strategy can be integrated into many Berenberg Investment Solutions and can also be incorporated into multi-asset portfolios (including master funds or special fund structures) as an overlay solution.

Effective risk management

The importance of cost-effective risk management for limiting high losses is widely known and extensively documented in academic literature and in practice. The massive stock market declines following the outbreak of the Covid-19 pandemic, the Russian invasion of Ukraine and the return of inflation, resulting in a rise in interest rates, have led to a renewed call for investment strategies with professional risk management and a focus on loss limitation. One way of limiting losses to a pre-defined threshold are so-called portfolio protection strategies. It is well known that there are no investment concepts that limit losses on the one hand and allow full participation in positive market regimes on the other. However, portfolio protection strategies can offer real added value for investors over whole market cycles and for investors who seek to limit potential losses. They enable these investors to participate in the market and invest in assets that could not be considered without protection due to their loss intolerance.

Functionality of portfolio protection strategies with a maximum loss value

Portfolio protection strategies with a maximum loss value can often be broken down into three steps:

Risk measurement

The first step is to calculate the expected loss of the portfolio over a specified future period in a negative market

Risk monitoring

In the second step, the risk-bearing capacity of the portfolio is determined. To do this, the potential loss from step one is compared with the risk that the investor has agreed to take. This makes it possible to assess whether the portfolio would fall below the previously defined loss threshold in a negative risk event.

Risk reduction

As soon as it is determined that the risk of the portfolio exceeds its capacity, the portfolio risk is reduced by selling or hedging positions. This ensures that the portfolio risk is in line with the acceptable risk and that the portfolio value does not fall below the lower limit.

Berenberg Protected Multi Asset Strategy (ProMAS)

The Berenberg ProMAS portfolio protection strategy focuses on the efficient use of the available risk budget. In addition to cost-effective risk management, the aim of ProMAS is to significantly reduce the probability of cash locks. In contrast to conventional models, the risk budget is used according to a proprietary model, reducing the dependency on a specific release date. This makes it possible to limit losses at an early stage in order to benefit from possible recovery phases due to the remaining risk budget. The long live track record since 2008 has allowed the strategy to be developed and tested over a long period of time to ensure solid and sustainable performance. The ultimate goal of the mechanism is to allow the investor the highest possible participation in rising capital markets while adhering to pre-defined risk limits. In the medium and longer term, this can only be achieved if cash locks are avoided as much as possible, as otherwise it will not be possible to participate when the market recovers.

The performance of portfolio protection strategies can therefore vary greatly in different market scenario

Rising markets

In rising markets there is little need to intervene, so the performance should be similar to a strategy without protection and hardly differ among providers.

Sideways-moving markets

Sideways-moving markets with high volatility pose a challenge for portfolio protection strategies as they are pro-cyclical.

Declining markets

Portfolio protection strategies can limit losses in negative extreme markets. However, participation in any recovery movements is usually below average.

Case studies from existing mandates

Source: Bloomberg, live mandate performance after costs
Own calculation

Important notice: Investing involves risk. The value of investments and the income derived therefrom may fall as well as rise and investors may get back less than the amount invested. Past performance is not an indicator of future returns.

Your Contacts

Philipp Loehrhoff
Head of Multi Asset Solutions
Moritz Schierholz
Portfolio Manager Multi Asset Solutions
Maximilian Gauglitz
Portfolio Manager Multi Asset Solutions
Manuel Hochsam
Portfolio Manager Multi Asset Solutions
Isabell Silverio
Product Specialist Multi Asset
Phone +49 69 91 30 90-598