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Insight plays it safe with derivatives

Insight Investment’s multi-asset team believes its strategy of using derivatives to hedge risk and isolate investment exposure to particular parts of the market will be useful if markets decline because it can see no obvious safe havens.

The company says 95 per cent of its holdings have been hitting highs for weeks and while it is happy to let the winners run, it is also preparing for the possibility that the market rally may come off the rails. If this happens, the company expects to see a sharp sell-off rather than a gradual decline.

Last year, Government bonds provided some shelter for investors but Insight is not sure they would be sufficient this year, particularly if the attempts to stimulate the economy through quantitative easing fails.

Rather than scrabbling around to find the next safe haven, Insight is opting to embed some certainty of return into its portfolio through derivative strategies that generate returns independent of stockmarket movements.

Derivatives are also liquid, allowing Insight to react and get out of positions quickly without trading in and out of the investment funds it uses to generate returns above the market average. Liquidity is regarded by Insight as crucial following last year’s financial crisis when many investors could not get out of holdings because there were no buyers.

Insight Investment head of multi-asset group Mike Pinggera says: “In many ways, the upside is easy. Our big concern is what happens when something is coming off, identifying when to cut a loss. We spent the first quarter getting the portfolio where we wanted it, but liquidity was the top of the wishlist. Knowing our portfolios are liquid means positions can be traded quickly.”

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