Capital preservation strategy
A capital preservation strategy (also hedging strategy or English portfolio insurance ) is intended to protect the investor against unfavorable market developments on the securities markets ( market risks ) by means of special financial instruments and other measures . While the investor fully participates in market movements up or down without protection, the protection limits his possible loss - but in return he also loses part of his profit opportunities.
Many capital preservation strategies only reduce the systematic risk of a portfolio , i.e. risks from movements in the entire market. According to the current state of science, lowering the systematic risk is always accompanied by a loss of profit .
The unsystematic risk , the negative development of an individual investment, on the other hand, can be limited by diversification ( portfolio selection ). The portfolio return of a portfolio corresponds to the weighted return of all securities, while the portfolio risk (with suitable security selection) is lower than the weighted risk. In this respect, there are no costs for this form of value protection.
Capital preservation strategies are divided into static and dynamic strategies. With static hedges, the structure of the portfolio is not changed or only changed once, with dynamic strategies, however, the adjustments are made depending on the market trend.
Widespread static capital preservation strategies are
- Buy and hold : This investment strategy aimsto acquire trading objects and not to sell them in the long term. Financial instruments are held until their maturity .
- Stop-Loss : With this singlevalue hedge, a security is sold immediately if the price falls below a specified price limit. The sale takes place at the currently valid market value ( best ) and can fall below the limit.
- Protective put strategy : An option is acquiredwith the security thatguarantees a minimum sale price.
- Portfolio insurance with calls : Instead of buying a security ( underlying ), you acquire an option on one. If the security performs poorly, you let the option expire and only lose the cost of the option, not the depreciation of the underlying.
Common dynamic capital preservation strategies are
- Synthetic put
- Constant Proportion Portfolio Insurance (CPPI): Depending on the market situation, a switch is made between risky stocks and risk-free bonds .
- Short Future (short sale)
- Money management : systematic limitation of the size of individual securities positions