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Diversifying Diversification: Downside Risk Management with Portfolios of Insurance Securities

Vineer Bhansali and Jeremie Holdom
The Journal of Portfolio Management May 2021, 47 (6) 101-113; DOI: https://doi.org/10.3905/jpm.2021.1.229
Vineer Bhansali
is the founder and CIO at LongTail Alpha, LLC, in Newport Beach, CA
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Jeremie Holdom
is an economic research strategist at LongTail Alpha, LLC, in Newport Beach, CA
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Abstract

Investors are always in search of diversifying securities and strategies to assist in downside risk management. The authors consider six popular diversifying securities: gold, Swiss franc, Japanese yen, bond futures, S&P 500 80% strike put options, and trend-following strategies. Using 50 years of data, the authors demonstrate that a portfolio approach to diversification strategies results in more robust outcomes when combined with a portfolio that has large equity exposure. Although each of the individual securities can be more or less beneficial in specific periods and environments, the authors conclude that a simple portfolio approach to diversification, whether optimized or not, allows investors to robustly manage risk while not being overly concentrated.

TOPICS: Portfolio construction, risk management, security analysis and valuation, currency, options

Key Findings

  • ▪ Many securities and strategies, such as gold, yen, Swiss franc, bond futures, S&P 500 Index put options, and trend following, have all been used for downside risk mitigation.

  • ▪ Over 50 years of history, each of these strategies assists in mitigating risk and improving the performance of a portfolio with S&P 500 exposure.

  • ▪ However, by diversifying diversification (i.e., by combining these strategies), we demonstrate that more robust portfolio outcomes can be realized without the possibility of hindsight bias or over-reliance on one risk mitigation strategy.

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The Journal of Portfolio Management: 47 (6)
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Diversifying Diversification: Downside Risk Management with Portfolios of Insurance Securities
Vineer Bhansali, Jeremie Holdom
The Journal of Portfolio Management Apr 2021, 47 (6) 101-113; DOI: 10.3905/jpm.2021.1.229

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Diversifying Diversification: Downside Risk Management with Portfolios of Insurance Securities
Vineer Bhansali, Jeremie Holdom
The Journal of Portfolio Management Apr 2021, 47 (6) 101-113; DOI: 10.3905/jpm.2021.1.229
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