There’s no such thing as a free lunch, of course, and under some conditions the strategy could underperform – the structure effectively transfers risk from the left-tail of the return distribution (risk-off events) to the right tail (aggressive market rallies). Investors may be swapping gap-down risk for gap-up risk, but according to one satisfied customer, “it’s a very good late-cycle trade”.
Like fast convergence, application of the SUV magic dust could be far-reaching. The delta-hedging mechanism can be tailored to improve performance for asset owners’ bespoke call-selling activities. It’s a level of inventiveness rivals haven’t been able to match, according to another pension client. “They came up with something that is very, very clever and others haven’t. This gave us better performance while still maintaining the spirit of what we are trying to do, so it’s still very much a hedge.
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