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Equity Derivatives Strategies: Using an Optimal Hedging Portfolio to Improve Risk-Adjusted Returns

At the tail end of a protracted cycle with equity markets setting new highs, how can investors protect their portfolio against equity downturns without forgoing long-term growth? In the short run, cash is always the safest asset, helping investors to manage their risk exposures and meet short-term liabilities. However, with interest rates remaining below inflation in most G10 currencies, a high cash allocation poses a major challenge for meeting long-term return objectives. Derivatives can help to overcome this problem by allowing investors to manage their risk exposures without increasing their cash allocation significantly.

At Unigestion, we have developed a complementary set of hedging strategies that protect against various types of market stress to help asset owners improve the risk-return efficiency of their equity allocation. In this paper, we focus on how to improve risk-adjusted equity returns by using an optimal hedging portfolio of futures combined with a low risk equity strategy.

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