Market Protection for Turbulent Times
Learn why and how to add risk mitigation strategies to your portfolio, particularly in a market downturn.
PGIM Quantitative Solutions’ Market Participation Strategy (MPS) is a risk-mitigation strategy (RMS) seeking to deliver consistent returns by providing upside market capture while limiting portfolio losses during market downturns*.
Adding MPS to a well-diversified portfolio may lower overall standard deviation with similar returns, resulting in an improved risk/return profile.
Risk, particularly the risk of large drawdowns, can be costly. MPS has limited losses during periods of market turbulence.
Similar to hedge funds, MPS may enhance diversification and risk-adjusted returns but with much more attractive fees.
MPS may help clients achieve their long-term return objectives by capturing approximately 60% of an equity index upside while participating in only 30% of the downside, resulting in performance similar to the index with substantially lower volatility.
MPS can be an important and positive relative contributor to your overall portfolio risk budget due to its natural risk-reward characteristics, typically measured by Sharpe ratio. As a result, it can help free up additional risk within your risk budget to redeploy elsewhere as needed from a portfolio construction perspective. MPS is particularly compelling during periods of market crises when asset classes can become highly correlated and the benefits of diversification are less pronounced.
We have extensive experience creating customized solutions that target investors’ desired equity market upside participation while limiting downside. We do this by investing in both Treasury bonds and long-dated equity call options and varying the allocations to each according to investor specifications. This approach has historically delivered on, or exceeded, client expectation while also having almost zero correlation to bonds and a low beta to equities, and when added to a diversified investment portfolio, can enhance the overall risk-reward profile. With its 30-year track record, MPS has demonstrated its ability to meet both upside participation during bull markets and downside protection targets during bear markets.
MPS is managed by an experienced portfolio management team which has remained consistent since inception (Jan 1992).
MPS has outperformed relative to other risk management strategies, with lower maximum drawdowns and therefore, higher Sharpe and Sortino ratios. The MPS’ risk/return profile is similar to that of various hedge funds, but at a far more affordable fee structure.
MPS has an average 80% invested in Treasury bonds which allows for liquidity even during a market crisis.
Because MPS holds long-term call options, we eliminate the need for frequent trading, thus keeping the portfolio turnover low. Low turnover can be especially beneficial during periods of equity market turbulence/drawdowns, when liquidity is often an issue.
MPS has a low beta to the S&P 500 Index and virtually zero correlation to bonds.
PGIM Quant Solutions’ tactical views are incorporated into the portfolio as an overlay to our systematic parameters, modifying the timing and magnitude of our equity exposure and duration resets – two key levers driving portfolio performance.
By using options, the strategy is “long” volatility, which means we have positive exposure to volatility, a key component in reducing risk. Call options are custom-designed with brokers and then listed on the CBOE, reducing counterparty risk.
MPS has much lower fees compared to most RMS and other alternative investment strategies. We charge a competitive, asset-based management fee only, and do not use carried interest or performance-based fees.
MPS can be part of a well-designed strategic asset allocation framework. MPS leverages the skill of our portfolio managers, who work together across investment teams to combine equity/options expertise with asset allocation experience in the application of tactical views to determine portfolio exposures. Portfolio managers consider current market conditions, their overall economic outlook, and the liquidity available in the marketplace, along with the quantitative parameters used as a guide to reset equity exposures. With its proven 30-year track record, MPS has met its objective of decreasing total portfolio standard deviation while increasing Sharpe and Sortino ratios and lowering maximum drawdown. See how MPS can help you achieve your investment portfolio objectives through participation in equity market upside while limiting the downside.
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* There is no guarantee this objective will be achieved.