We’re seeing a new market order emerge today. The frequency of regime changes, or shifts in the economic and market environment, has increased significantly. These changes can have profound impacts on investment portfolios, particularly those with substantial equity holdings. In this context, it’s crucial to have equity strategies that can adapt swiftly and effectively. One such approach is the use of integrated futures strategies.
Integrated futures strategies represent a sophisticated approach to managing equity risk within your portfolio. By combining the traditional management of equities with the strategic utilization of futures contracts, these strategies aim to adapt swiftly to market fluctuations, insulate portfolios from downside risks, and potentially amplify returns.
Consider a scenario where a sudden shift in monetary policy leads to a surge in interest rates. This could trigger a sell-off in the equity markets, causing substantial losses for equity-heavy portfolios. An integrated futures strategy could help mitigate this risk. By holding futures contracts that are expected to increase in value during such a scenario, the losses on the equity side could be offset, protecting the portfolio’s overall value.
A significant advantage of integrated futures strategies lies in the precise control they offer over risk exposures. The direct integration of futures contracts into the equity mandate allows for the fine-tuning of risk management strategies. Integrated strategies seek to target equity-specific risks with increased accuracy by employing techniques like beta modulation.
What is Beta Modulation?Integrating an equity portfolio with futures increases the potential for overexposure to equity risk, as the implicit leverage used in the futures component could alter the strategy’s beta profile in certain market environments. Beta modulation attempts to keep the total portfolio’s beta range-bound in real-time by constraining it to pre-determined values, offering more precision in targeting such risk. |
For instance, in a regime characterized by high market volatility, an integrated futures strategy could reduce the portfolio’s beta, or sensitivity to market movements, by taking short positions in futures contracts. This would help insulate the portfolio from downside risks, providing a buffer against potential losses.
Integrated futures strategies also enhance capital efficiency within your portfolio. Futures positions can be collateralized using a modest cash position from the equity portfolio. This collateralization allows for effective risk mitigation and the optimization of leverage. Consequently, these strategies can potentially amplify returns while committing a smaller capital allocation, optimizing capital efficiency, and enhancing the overall performance of equity holdings.
Let’s now consider a regime where equity markets are booming, and there’s a strong positive correlation between market returns and a particular economic indicator. An integrated futures strategy could take long positions in futures contracts linked to this economic indicator, effectively increasing the portfolio’s exposure to the booming equity market without having to invest additional capital in equities.
While integrated futures strategies offer precision and adaptability, they may also introduce general risks like the speculative nature of futures and specific risks such as potential overexposure to equity markets. Both emphasize the need for specialized expertise. Mismanagement or misalignment with investment objectives can lead to unintended risks and even magnify them, making it crucial to engage the right, complementary expertise.
In conclusion, integrated futures strategies offer a possible solution for managing equity risk within portfolios, particularly in the face of frequent regime changes. By seamlessly blending the management of equities with the strategic utilization of futures contracts, these strategies seek to provide precise control over risk exposures, enhance capital efficiency, streamline governance, and potentially reduce costs. However, the approach requires your integration manager to engage the right expertise in order to tap into these benefits.
In our next post, we’ll explore the alternative approach of using futures overlay strategies and compare it with the integrated approach.
For U.S. Investors:
The views presented are for educational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. This information should not be used as the sole basis for investment decisions. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. All content is presented by the date(s) published or indicated only and may be superseded by subsequent market events or other reasons. You should not rely on this information as the primary basis for your investment, financial, or tax planning decisions. While every attempt is made to ensure that all information is accurate, there is no representation or warranty, express or implied, as to the accuracy and completeness of the statements or any information contained herein. Any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.
Past performance cannot predict future results. Investing involves risk, including possible loss of principal, fluctuation in value, and total loss of investment.
Investing in futures is speculative, involves substantial risk, and is not suitable for all investors and is for designated institutional investors who have the resources and financial expertise to understand the risks and limitations of such a strategy.
This information may be restricted by law, may not be reproduced or referred to without express written permission or used in any jurisdiction or circumstance in which its use would be unlawful. We are not responsible for any unlawful distribution of this material to any third parties, in whole or in part. The contents of this material have not been approved or endorsed by any regulatory agency.
For Europe Investors:
The views presented are as of the date published. They are for educational purposes only and should not be used or construed as investment, legal or tax advice or as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. Nothing in this material shall be deemed to be a direct or indirect provision of investment management services specific to any client requirements. Opinions and examples are meant as an illustration of broader themes, are not an indication of trading intent, are subject to change and may not reflect the views of others in the organization. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its use. Janus Henderson Investors is the source of data unless otherwise indicated and has reasonable belief to rely on information and data sourced from third parties.
Past performance cannot predict future results. Investing involves risk, including possible loss of principal, fluctuation in value, and total loss of investment.
Investing in futures is speculative, involves substantial risk, and is not suitable for all investors and is for designated institutional investors who have the resources and financial expertise to understand the risks and limitations of such a strategy.
Not all products or services are available in all jurisdictions. This material or information contained in it may be restricted by law, may not be reproduced or referred to without express written permission or used in any jurisdiction or circumstance in which its use would be unlawful. Janus Henderson is not responsible for any unlawful distribution of this material to any third parties, in whole or in part. The contents of this material have not been approved or endorsed by any regulatory agency.
Issued in Europe by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Janus Henderson Investors Europe S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). Investment management services may be provided together with participating affiliates in other regions.
Janus Henderson and Knowledge Shared are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.
For Australian Investors:
This information is issued by Intech Investment Management LLC (Intech) and is intended solely for the use of wholesale clients, as defined in section 761G of the Corporations Act 2001 (Cth) and is not for general public distribution. Intech is permitted to provide certain financial services to wholesale clients pursuant to an exemption from the need to hold an Australian financial services licence under the Corporations Act 2001. Intech is regulated by the United States Securities & Exchange Commission (SEC) under U.S. laws, which differ from Australian laws. By receiving this information you represent that you are a wholesale client.
Past performance cannot predict future results. Investing involves risk, including possible loss of principal, fluctuation in value, and total loss of investment.
Investing in futures is speculative, involves substantial risk, and is not suitable for all investors and is for designated institutional investors who have the resources and financial expertise to understand the risks and limitations of such a strategy.
This information may be restricted by law, may not be reproduced or referred to without express written permission or used in any jurisdiction or circumstance in which its use would be unlawful. We are not responsible for any unlawful distribution of this material to any third parties, in whole or in part. The contents of this material have not been approved or endorsed by any regulatory agency.
