Downside as Opportunity: The Power of Structured Positions in Volatile Markets

Wow, that’s a strange title, isn’t it? Who (other than those short the market) would hope for a market downturn?

Structured Position investors, that’s who.  Why, you ask?

Structured Positions come in several varieties, but I’ll illustrate just one for now:  a low-risk position.

For my low-risk investors, downturns are opportunities. With proper puts in place, there is the opportunity to reposition, possibly even at a gain vs. original investment (and that much ahead of the market), and ride the market back up---potentially gaining a market-multiple return on the upturn!

This is most extreme, and beneficial, for the Black Swan risk of the strategy.  In this scenario, we implement a two-year position with 1.5X the chosen index upside (e.g., S&P 500).  But the market drops precipitously by 60% due to some calamity; interest rates collapse as well, as the Fed attempts to stoke a damaged economy.  

In this situation, a Structured Portfolio investor has protective securities that counteract the market losses on the fixed income position.  In addition, using Bloomberg indicative pricing, even though the upmarket securities are almost a total loss, the protective securities purchased have lots of time value left. I ran the numbers, and they have enough time value to put the position UP 4%, rather than DOWN 60%.  

Even with lower interest rates, we can reposition at this lower level, and again using Bloomberg indicative pricing, we can ride the eventual upturn up at about 1.3 times any gain before expiration.  This assumes we decide to take risk on the fixed income portion at that time, and forgo the protective securities on them, but we can always purchase them instead, and accept a modestly lower upside multiple. 

There is strategy---and then there are tactics.  Monitoring these positions to take advantage of outperformance creates the opportunity to enhance long term returns even further.

The Structured Portfolio investor has preserved principal against a calamitous loss, and can ride the eventual upturn at a higher rate than the market overall.

This is why I love what I do. I don’t pray for horrible market situations---but I and my low-risk investors are more than prepared to benefit from them.