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Insight using call options to control exposure risks

Insight’s multi-asset team is using long and short investment strategies and derivatives to generate returns from specific parts of the market and reduce risk in its multi-manager portfolios.

Head of multi-asset Mike Pingerra says the team recently wanted to gain property exposure through Reits. A recovery in the property market could be a way off but Insight believed there was a lot of value in Reits and accessed the market through an exchange traded fund, which provided liquidity.

The firm did not want the equity exposure of tracking an index of property shares, so it hedged this out by taking a short position on the FTSE 100. Pingerra says he closed this position when Reits went up by 40 per cent and the FTSE 100 went up 20 per cent.

To offset market risk when investing in equities, Insight buys call options which provide the right but not the obligation to buy shares at a set price before an expiry date. If a share price rises, Insight will profit from the difference between the share price and the call price. If the share price falls, losses are limited to the premium Insight paid for the options, rather than losing capital.

Pingerra says: “Where we put risk into the portfolio, we use call options to add liquidity and transparency. This takes a bit of our budget but we want asymmetric exposure. We think we are well positioned for the continued upswing in markets and have the ability to grind out results if the recovery comes off the rails.”


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