Effective downside risk management: Distinguishing between core protection and tail risk strategies

There is an increasing demand for protection against falls in markets and there is a wide range of instrument and strategies that can be used for downside risk management

We find that:

  • In order to decide on the appropriate approach to managing downside risk, investors need to be clear about their risk tolerance for different outcomes
  • Downside risk management is complex and involves understanding the nature of volatility and the costs involved
  • Improved diversification is the first step in any downside risk management programme. Layers of protection can then be added that are consistent with the investor’s risk tolerance
  • Dynamic management is necessary for some instruments given the high cost of holding them for an extended period
  • An approach that combines core protection with hedging tail risks is more adaptable to changing conditions.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.