Downdraft Hedging

Dynamic Wealth Protection for Equity/Bond Investments

In this article we analyse two dynamically allocated U.S. equity/bond indices. These are

Barclays Dynamically Balanced Index (USBITR) and NYSE’s Dynamically Allocated Index

(NYUSDA).

The two indices are compared with the results from a downdraft hedging strategy based on Byesian statistics. The approach analyses the location of structural changes and breaks in the dynamics of the underlying stock/bond assets that form the rules for rebalancing the investment.

This process of wealth protection may be of general interest for insurance companies and pension funds during times of volatile stock markets and low or even negative interest rates.

Downdraft hedging is thus an ideal tool for separately managed accounts, mutual funds and exchange traded funds.