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No, the Milliman Managed Risk Strategy does not use options—instead, it utilises exchange-traded futures contracts. Established in the early 1970s, financial futures contracts are agreements to buy or sell a financial instrument at a predetermined price in the future. The financial futures market is one of the most transparent and liquid markets in the world, and accounts for over US $1 trillion per day in contract value.
Historical risk strategies focused on establishing a floor on losses within a portfolio. This strategy works in a crisis, but we believe that a futures-based guidance strategy is more cost-effective and secure, as well as a better fit for portfolios maintained across market cycles.
Brokers can undertake a future shorting strategy for a portfolio, but that strategy comes with risk management challenges. Other brokers in the US are not in a position to manage risk at night when the Asian markets are open and may not be well situated to hit specific hedging targets. Our investment professionals operate from a global trading platform (Chicago, London, and Sydney) and monitor portfolio risk and react to changing market conditions on a 24-hour basis. In addition to managing overnight risk, the Milliman Managed Risk Strategy also targets a specific volatility level and has established infrastructure in place to manage the rebalancing and rolls of futures to maintain an accurate hedge against sustained market losses.
Portfolio insurance tries to replicate a short-term floor and requires frequent and sometimes excessive trading. Instead, the Milliman Managed Risk Strategy synthetically replicates an ever-green, longer-dated put option. Our strategy avoids a large amount of intra-day trading and the selling spirals that drive a bear market further down, while addressing other historical problems associated with portfolio insurance.
Historically, portfolio insurance suffers from reduced liquidity in times of market stress and an over-reliance on computerised trading models. Our strategy addresses liquidity issues by using the most liquid and most deeply traded futures markets, and we do not rely on computer models to execute trades. The experienced, global Milliman Financial Risk Management, LLC trading team can incorporate market factors into the decision making process that a computer model cannot.
The main reason cited for the 1987 crash was portfolio insurance trading strategies and their reliance on computerised trading models, which caused a vicious cycle to ensue when models continued executing larger and larger short trades as the markets declined.
We believe the downfall was in the strategy model, which aimed to manage investments over short periods of time (one-year to three-year preservation periods). The Milliman Managed Risk Strategy seeks to provide guidance over a longer time horizon (10 years). Longer-term options do not require the same large rebalancing trades as the market declines.
Milliman also does not rely on computer models to execute trades, but on an experienced and global team of traders who can incorporate market factors into the decision making process that a computer model cannot.
To learn more about the Milliman Managed Risk Strategy, please contact us at +1 855 645 5462.
Recipients must make their own independent decisions regarding any strategies or securities or financial instruments mentioned herein.
The products or services described or referenced herein may not be suitable or appropriate for the recipient. Many of the products and services described or referenced herein involve significant risks, and the recipient should not make any decision or enter into any transaction unless the recipient has fully understood all such risks and has independently determined that such decisions or transactions are appropriate for the recipient.
Any discussion of risks contained herein with respect to any product or service should not be considered to be a disclosure of all risks or a complete discussion of the risks involved. The recipient should not construe any of the material contained herein as investment, hedging, trading, legal, regulatory, tax, accounting or other advice. The recipient should not act on any information in this document without consulting its investment, hedging, trading, legal, regulatory, tax, accounting and other advisors.