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Understanding Portfolio InsurancePortfolio insurance is a hedging technique frequently used by institutional investors when the market direction is uncertain or volatile. Short selling index futures can offset any downturns, but it also hinders any gains. This hedging technique is a favorite of institutional investors when market conditions are uncertain or abnormally volatile.
This investment strategy uses financial instruments, such as equities, debts, and derivatives, combined in such a way that protects against downside risk. It is a dynamic hedging strategy that emphasizes buying and selling securities periodically to maintain a limit of the portfolio value. The workings of this portfolio insurance strategy are driven by buying index put options. It can also be done by using listed index options. Hayne Leland and Mark Rubinstein invented the technique in 1976 and it is often associated with the Oct. 19, 1987, stock market crash.
Portfolio insurance is also an insurance product available from the SIPC that provides brokerage customers up to $500,000 coverage for cash and securities held by a firm. The SIPC was created as a non-profit membership corporation under the Securities Investor Protection Act. The SIPC oversees the liquidation of member broker-dealers that close when market conditions render a broker-dealer bankrupt or put them in serious financial trouble, and customer assets are missing.
In a liquidation under the Securities Investor Protection Act, SIPC and a court-appointed trustee work to return customers’ securities and cash as quickly as possible. Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only).
This investment strategy uses financial instruments, such as equities, debts, and derivatives, combined in such a way that protects against downside risk. It is a dynamic hedging strategy that emphasizes buying and selling securities periodically to maintain a limit of the portfolio value. The workings of this portfolio insurance strategy are driven by buying index put options. It can also be done by using listed index options. Hayne Leland and Mark Rubinstein invented the technique in 1976 and it is often associated with the Oct. 19, 1987, stock market crash.
Portfolio insurance is also an insurance product available from the SIPC that provides brokerage customers up to $500,000 coverage for cash and securities held by a firm. The SIPC was created as a non-profit membership corporation under the Securities Investor Protection Act. The SIPC oversees the liquidation of member broker-dealers that close when market conditions render a broker-dealer bankrupt or put them in serious financial trouble, and customer assets are missing.
In a liquidation under the Securities Investor Protection Act, SIPC and a court-appointed trustee work to return customers’ securities and cash as quickly as possible. Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only).
