The Use of Equity Factor Investing for Portfolio Insurance

Equity investments promise high expected returns, but not many investors can tolerate the associated risks. A possible solution may be to complement the equity strategy with a portfolio insurance element which ideally reduces the equity exposure whenever necessary to prevent the overall strategy from breaching a pre-defined floor. Based on a block-bootstrap methodology, we show that the choice of equity underlying is key in this context; in particular, low-volatility underlyings are to be preferred, with other multi-factor propositions forming suitable alternatives when considering additional elements of dynamic risk management