Go Green With A Hedge

January 1, 2021

Dominick Paoloni, CIMA®
CIO & Founder
Portfolio Manager, IPSAX
Adjunct Professor, University of Denver
& University of Colorado

As the significant environmental and societal challenges facing us in the 21st century become ever more apparent, more and more investors are looking to invest in socially responsible ways.  Recognition of the importance and power of sustainable, responsible, and impact investing is leading to a remarkable transition in the way we, as a society, are managing money, as investors are increasingly concerned with more than raw profit.

Clients have expressed that the environment is among their top concerns, and they would love to have their investments reflect this.  What is more important than the world we leave behind for our children?  Responsible investment decisions can have a huge positive impact.  What will our legacy be?

Environment, Social, and Governance (ESG), Socially Responsible Investing (SRI), and Impact Investing are now an important element of future investing and already account for more than 25% of all U.S. assets under management.  We welcome this at IPS, and we see tremendous opportunity for our clients to engage in socially responsible investing and benefit from the massive global paradigm shift as the world transitions to a cleaner, renewable energy.

Given the renewed commitment by the United States to invest in and expedite the transition to renewable energy, we believe ESG investments offer tremendous upside in addition to their intrinsic appeal.  Whereas in the past, the conventional wisdom was that investors would have to sacrifice performance if they wished to align their portfolios with their principles, the new reality is that, according to leading global indices, the vast majority of ESG investments have outperformed most of their non-ESG equivalents since 2012.

Since 2012, not only would investing in a diversified 100% ESG portfolio not have sacrificed upside opportunity compared to a non-ESG portfolio, the sustainability indexes outperformed their non-ESG equivalents.  The potential risk of investing in 100% green is the same as investing in any diversified portfolio.

In fact, peak to trough, throughout the Covid-19 drawdown, the MSCI ACWI ESG World index was down -34%, which matched the drawdown of the S&P 500.   So, despite the impressive upside potential, there is still a considerable market risk, even in a diversified green portfolio.  So, the imperative question is, can we invest sustainably, take advantage of the upside potential, yet still protect against a severe, wealth-destroying market downturn.  The answer is yes.

How are we able to effectively hedge?  Bonds?  No!  In a zero-interest rate environment, using bonds to protect and diversify a portfolio has proven to be ineffective, as we have seen during the COVID-19 drawdown.

We offer a better solution and believe that our ability to hedge without relying upon bonds and protect against the downside with an ESG hedge makes us unique in the marketplace.  IPS Strategic Capital strongly believes in the value and upside potential of ESG investing, and we are excited to do so with a defined downside hedge that is also 100% green.

We are proud to offer hedging solutions that have shown to protect against the downside with tools that are also 100% sustainable.  The IPS Bear Strategy methodology can be deployed across different indexes including the Invesco Solar Index (TAN) and iShares Global Clean Energy (ICLN).

In fact, the strength of the IPS Bear Strategy can be applied to any optionable ESG index, providing a very low-cost hedge to protect and grow your green portfolio without the worry of a severe market correction.

We strongly believe that ESG investing represents a tremendous opportunity, and with the protection offered by our innovative hedging solutions, the timing is excellent.  The world of the future will increasingly be powered by renewables, which are increasingly cost-competitive even without factoring in environmental and health costs.   According to the International Energy Agency, renewables will fulfill 80% of new energy demand over the next decade, with solar leading the way.  Let us help you invest, support, and benefit from this change with the protection provided by IPS’ green hedging solutions.

IPS Strategic Capital is a Quant firm that builds hedging solutions for corporations, endowments, pensions, advisors, and individual clients. For other hedging strategies or custom hedging solutions please contact IPS Strategic Capital (Investps.com) at 303-697-3174                

Dominick Paoloni, CIMA is a member of the OIC Advisory Council and the TD Ameritrade Trading Panel. Mr. Paoloni guides future professionals as an Adjunct Professor at the University of Denver and the University of Colorado. He is a published author and is frequently quoted in financial journals and can be reached at dominick@investps.com

DISCLAIMER: The information on this website should not be misconstrued as an offer to buy or sell, or a solicitation to buy or sell securities. With any investment, past performance is not necessarily indicative of future performance.

One should always consult an investment advisor before making any investment decisions as well as consider the investment’s objectives, risks, charges, and expenses carefully before investing or sending money. This and other important information about the Strategy are available upon request.

One should always consult an investment advisor before making any investment decisions as well as consider the investment’s objectives, risks, charges and expenses carefully before investing or sending money. This and other important information about the Strategy is available upon request.

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