Crescit Protect offers a unique investment strategy that combines global equity exposure with sophisticated risk management. Below is a detailed overview of the fund's key elements and how they differ from traditional global equity funds.
Geographic allocation and derivative use
The fund allocates capital at the stock index level without taking a position on specific companies or sectors. This is achieved through the use of derivatives, primarily index futures and options. Unlike traditional funds that buy stocks directly, this method gives Protect greater flexibility and cost-effectiveness in its exposure.
Tailored Protection Program
Put option floor
Protect uses a unique protection program based on put options. This creates a “floor” on the fund’s value, limiting the maximum decline the fund can experience. For example, the fund can set a floor of -10%, meaning that even if the market falls 30%, the fund’s loss is limited to 10% at the end of the contract.
Capital protection
In addition to the put option floor, the fund has a capital protection that provides an extra layer of security. This can, for example, ensure that investors do not lose more than 10% of their invested capital during a given period.
Active Risk Management
Protect's risk management is dynamic and continuously adapts to market conditions. During periods of increased volatility, the fund can increase its protection by purchasing more put options or adjusting their strike prices. This allows the fund to begin its recovery from a higher base after market declines, benefiting over time from the compounding effect.
The fund aims to deliver an equity-like return that, over an investment cycle, is at parity with global equity indices, while reducing volatility by 30-40%.
Correlation and Volatility
Protect is designed to have a high correlation (above 0.9) with global equities during stable market periods. However, during sharp downturns, the correlation decreases significantly (can fall below 0.5), providing effective protection. This results in a more stable return profile with lower volatility than traditional equity indices.
Composition of the index basket
To achieve global exposure, Protect uses a basket of four carefully selected indices:
- S&P 500 (USA)
- Euro Stoxx 50 (Europe)
- Nikkei 225 (Japan)
- FTSE 100 (United Kingdom)
These indices have been selected based on their high liquidity in the options markets and their ability to collectively represent the global stock market.
Historic achievement
During the 2008 financial crisis, when global stock indices fell by over 50%, a simulated Protect strategy limited the decline to around 25%. During the 2020 Covid-19 crisis, global stocks fell by 34%, while Protect only fell 8.4%.
Risks and Limitations
Despite its advantages, it is important to note that the Protect strategy may underperform in strong rising markets due to the costs of the protection program. In addition, the strategy requires high liquidity in the options markets, which may limit the size or flexibility of the fund during extreme market conditions.
In summary, Crescit Protect offers a sophisticated solution for investors seeking global equity exposure with built-in protection, providing the potential for long-term excess returns with limited downside risk.
