Ryan Labs, has recently launched a Defensive Risk Premia (DRP) strategy, designed for corporate, public and Taft-Hartley/multi-employer defined benefit plans, as well as other institutional clients, to offset or “hedge” losses from equity market downturns that negatively impact the equity portion of their portfolio – while providing the potential for superior risk-adjusted returns.
DRP takes advantage of a broader trend towards crisis risk offset strategies and tail risk mitigation. This is particularly salient in today’s equity market environment where even with the recent market correction, we remain in one of the longest equity bull markets on record.
DRP uses a proprietary model that monitors a broad set of economic variables on a daily basis and is designed to identify key current drivers of equity and Treasury returns when there is elevated risk in equity markets, and a hedge is justified.
Traditionally, investors have hedged equity market downturns in two ways, by investing in put options or by investing in a portfolio of low volatility stocks. These strategies are both effective however, can be very costly or not effective in extreme equity market stress where correlation among stocks tend to increase.
The benefit of using a DRP strategy approach is that treasury futures contracts are only overlaid when justified by a risk indicator. DRP provides a cost effective strategy offsetting short-term equity market declines using a temporary overlay of treasury futures. Rather than being directly hedged 100% of the time, the DRP is designed to achieve hedge frequency of 10-15% over a market cycle, which significantly reduces the cost of hedging.