Ahead of the Curve: Time to Embrace Downside Risk

February 15, 2016
  • Contributors:

    Roni Israelov, Lars Nielsen
  • Topic:

    Derivatives

Investment & Pensions Europe

Buying equity index put options in order to reduce the downside risk of an equity portfolio (while maintaining the upside exposure) certainly sounds appealing. We all would like to avoid the discomfort felt during market downdrafts.

Sadly, it is not so easy. Because so many investors want to avoid that discomfort, the price of buying put options is high — to the point of eliminating the upside.

The good news is that this presents an opportunity for long-term investors willing to embrace downside risk. It may sound risky to actively seek out concentrated downside exposure, but insurance companies do it all the time, accepting the risk of potentially large losses for moderately sized insurance premiums.



  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.
  • The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
  • This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.
  • Past performance is no guarantee of future results.