While it’s important to mitigate portfolio risk through diversification, that is often not enough to prevent losses over short periods of time. Spikes in correlation and volatility have historically reverted to a mean, giving experienced portfolio managers important signals on when to buy cheap positions. By preparing portfolios for more severe markets, investors stand a better chance of staying invested.
Options can be an effective tool to cushion portfolios from shocks, and can also increase the efficiency of multi-asset portfolios. These hedging strategies are a key element we use to manage our multi-asset portfolios and our Global Allocation Fund. These strategies can be designed to minimize cost and allow investors to get more access to growth-oriented asset classes such as equities.
Learn how we use hedging strategies to take advantage of changes in volatility and correlation to improve portfolio returns by reading our Return Shaping in Multi-Asset Portfolios whitepaper.
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Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. Eurozone investments may be subject to volatility and liquidity issues. Investments in securities of growth companies may be volatile. Mid-sized company stock is typically more volatile than that of larger company stock. It may take a substantial period of time to realize a gain on an investment in a mid-sized company, if any gain is realized at all. Event-linked securities are fixed income securities for which the return of principal and interest payment is contingent on the non-occurrence of a trigger event that leads to physical or economic loss. If the trigger event occurs prior to maturity, the Fund may lose all or a portion of its principal and additional interest. Value investing involves the risk that undervalued securities may not appreciate as anticipated. Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and the Fund’s share prices can fall. Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Derivative instruments entail higher volatility and risk of loss compared to traditional stock or bond investments. Commodity-linked investments are speculative and have substantial risks, including the loss of principal. The Fund may also invest through a wholly-owned Cayman Islands subsidiary, which involves the risk that changes to the laws of the Cayman Islands could negatively affect the Fund. Diversification does not guarantee profit or protect against loss.