IPS BEAR STRATEGY

COVID-19 Draw Down 

The red line represents the S&P 500 through the downturn, which saw a 33.92% drawdown, while an overlay of the IPS Bear Strategy, which represents about 5% of the portfolio in hard dollars, had a maximum drawdown of 11.9% through the COVID-19 crisis.  One of the beauties of an IPS defined hedge overlay is that it enables investors to maintain their portfolios through a downturn without being forced into cash, avoiding negative tax implications.  The annualized return of the S&P 500 through this period was 8.86%, while the S&P hedge with the IPS Bear Strategy came in at 7.96%. 

Rebalance on a Periodic Basis 

Every well-managed hedge should be rebalanced on a periodic basis. The rebalance of the Bear Strategy allows us to monetize our hedge while still being fully protected if the market should continue to fall.

What value is a hedge if you do not monetize when the hedge becomes fully valued?

Stay Hedged Stay Invested

The IPS Bear Strategy is designed to be used as an overlay on top of a portfolio which, based on detailed regression analysis using an ex-post data framework, has shown to cut off a significant portion of downside tail risk.  This means that, rather than allocating a significant portion of their portfolio to an unreliable hedge using debt, investors can be far more aggressive, achieving an effective hedge by allocating as little as 5% to our overlay.

The blue line on this graph illustrates how well the Bear Strategy would have performed during market crashes.  The strategy has shown to deliver a downside Beta of -1.74 and an upside Beta of -0.30. This means that on average when the market is down -10%, the overlay will be up +17%, and when the market is up 10%, the strategy will be down -3%. This rules-based overlay should deliver structural alpha when added to a portfolio framework.

How Do I Allocate?

By adding 5% to a long-only portfolio which is represented by the blue line, the strategy reduces portfolio drawdown and substantially outperforms a 60%/40% stock/bond allocation on the upside as well as the downside. 

Disclaimer

Please note that the information contained in this piece is intended for investment professionals. This information should not be misconstrued as an offer to buy or sell, or a solicitation to buy or sell securities. Any performance contained in this article is strictly informational and is not necessarily indicative of the future performance of investments. Past performance is not indicative of future investment performance and investors should always consult a financial professional prior to making any investment decisions.
The performance of the IPS Bear Strategy is representative of the performance of the IPS Bear Strategy composite. This composite is managed via separately managed accounts. The performance data is shown net of fees. The performance of the accounts comprising the IPS Bear Strategy was scaled to a 20% exposure to represent a hypothetical portfolio that was invested 80% to the S&P 500 and 20% to the IPS Bear Strategy. This is purely a hypothetical portfolio that is intended to illustrate how the IPS Bear Strategy can be combined with equity exposure to provide reduced drawdown and volatility. Any performance relating to the S&P 500 is representative of the price returns of the index. Please note that the S&P 500 is an index and therefore not a directly investable asset.
The IPS Bear Strategy trades options contracts on the S&P 500 index. Prior to buying or selling an option, investors must read a copy of the Characteristics & Risks of Standardized Options. Put options give the purchaser the right, not the obligation, to sell a specified number of shares of the underlying security at a specified date in the future. The seller of a put option has the obligation, not the right, to have a number of shares delivered to them at a specified price at a specified date in the future in exchange for receiving a premium upfront for the risk.
The results shown here are strictly for informational and educational purposes. All investments have the potential for profit and the potential risk of loss. Changes in investment strategies, contributions, or withdrawals may cause the performance results of one’s portfolio to differ materially from the reported composite performance. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s portfolio. One should always consult an investment advisor before making any investment decisions.

Disclosures