Question

12. During the current COVID-19 pandemic, what type of investment strategy if successfully implemented is likely to minimize portfolio losses for an endowment fund or pension fund that wants to maintain its active exposure to the alpha generated by its portfolio equity managers?

1. Tactical asset overlay strategy.
2. Buying appropriate numbers of put options on the relevant equity indices.
3. Taking appropriate short positions in futures contracts on the relevant equity indices.
4. Both a. and c.
5. All of the above.

Answer 1

The correct answer is option e.

• Tactical asset overlay strategy
• Buying appropriate numbers of put options on the relevant equity indices. Put options are expensive during these times, but provides downside protection.
• Taking appropriate short positions in futures contracts on the relevant equity indices. There is no upfront cost in entering the short position, but we have to put margin amount and we have to make good for the mark to market losses.

All the above strategies provide downside protection to the equity portfolio.