Equities and bonds have endured a difficult year thus far in 2022 and uncertainty seems likely to persist. In this insight, Mark Richardson, Portfolio Manager, Diversified Alternatives, and Suny Park, Head of Institutional Client Strategy, North America, discuss the importance of portfolio protection for institutional investors, specifically systematic long volatility strategies that may offer a strategic hedge against radical uncertainties.

Key takeaways:

• Along with liquidity management, portfolio protection is a priority for institutional investors. In our view, one cannot design effective portfolio protection without anchoring it on systematic long volatility strategies.
• Black-Scholes delta systematically under-hedges the underlying equity market exposure of delta neutral systematic long volatility strategies, which in turn leads to higher carry costs.
• One can meaningfully lower the cost of carrying systematic long volatility portfolios via active management; therefore, it may pay to carry always-on options-based systematic long volatility portfolios to hedge against radical uncertainties.

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