Risk Mitigating Strategies

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• On: 08/19/2024 08:24:35
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By: Jean-Francois Tormo, Wilshire 

Over the last several years, Wilshire has observed increased appetite from institutional investors for Crisis Risk Offset, also referenced as Risk Mitigating Strategies. These programs tend to capture several strategies which have in common a low to negative correlation to equity markets. Most are systematic and capitalize on well-documented and researched risk premia and factors.

This is an excerpt from NCPERS Summer 2024 issue of PERSist.

Over the last several years, Wilshire has observed increased appetite from institutional investors for Crisis Risk Offset, also referenced as Risk Mitigating Strategies (“RMS”). These programs tend to capture several strategies which have in common a low to negative correlation to equity markets. Most are systematic and capitalize on well-documented and researched risk premia and factors.  

Each underlying strategy has a different response function to financial market shocks and behaviors. As a result, they can be assembled in multiple ways, depending on the level of expected protection to a prolonged equity market sell-off that is needed by the investor. 



There are multiple ways to construct RMS programs, with key considerations highlighted below for investors who are in the process of building and running these programs:  

• Establish the program as a strategic allocation before the actual downturn occurs, while also being prepared to be tactical/active when relevant.  
• RMS building blocks need to have defensive strategies (Trend Following) to provide convexity, which should be complemented with income-generating elements (Risk Premia) to offset the negative carry associated with the defensive components. Other components that are more dynamic can play both defensive and income-generating roles (Global Macro).  
• Allocate to underlying strategies with low correlations to increase the probability of performing well at different points in the cycle.  
• Manager selection is key to implementing these programs, with the goal of ensuring that the managers perform in line with their desired role – defensive, income-generating or both.  
• Active rebalancing is essential.  
• Maintain the ability to implement tactical tilts to some of the core components in stretch environments.  
• Remain disciplined in the allocation to the program during equity bull markets.  
• Furthermore, given the challenges that these programs may face in certain market environments, we believe that RMS programs can be enhanced by incorporating additional elements to the core components of Trend, Global Macro and Risk Premia, which may include:  
• Actively-managed tail risk strategies to enhance the convexity with managers and/or solutions that actively seek to minimize the negative carry and have systematic monetization rules in periods of strong performance.  
• Complement these programs with uncorrelated strategies to improve overall performance when markets rally.