From the August 01, 2012 issue of Futures Magazine • Subscribe!

Collaring multiple-asset ETFs to manage tail risk

Results analysis

In contrast to earlier studies that concentrated on equity markets, Szado and Schneeweis provide extensive analysis of the performance of collar strategies over a diverse set of asset classes including equities, currencies, commodities, fixed income and real estate.

Their study covers the period from June 1, 2007, to Dec. 30, 2011, except for the gold-based ETF, which begins on July 1, 2008, the first full month after the June 20, 2008, inception of gold ETF (GLD) option trading. The period of study was chosen to capture both the financial crisis and the subsequent market recovery. The risk-reduction and drawdown protection ability is evident in the results across all asset classes analyzed. 

As “Cross-market analysis” shows, the results are somewhat mixed from the perspective of total-return qualities. Two currencies (the Australian dollar and Japanese yen), the two bond ETFs (HYG and TLT) and the Nasdaq ETF (QQQ) and GLD had higher cumulative returns than any of the collar iterations.

In general, the analysis suggests that with respect to total returns, option-based collar strategies tend to outperform when drawdowns are more aggressive and tend to underperform in periods of extreme run-ups. 

More importantly, while option-based collars may not provide complete protection or maximum returns for all products and in all market conditions, collars can provide significant risk control across a wide range of asset classes, significantly reducing volatility and drawdowns. In certain market environments, the collar strategy also can provide enhanced returns relative to a stand-alone investment.

Philip Gocke is managing director of research and educational strategy for institutional investors at the Options Industry Council. He is responsible for educating pension funds, hedge funds and money management firms about the benefits and risks of exchange-traded options. He has worked for Van Der Moolen Options U.S.A. LLC, Bank of America’s Financial Market Advisory Group and the Federal Reserve Bank of New York.

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