Highlights

  • Traditional assets for reducing equity risk and diversifying holdings include high dividend-paying stocks, defensive stocks, long-dated US Treasuries, cash, gold, and core fixed income funds.
  • Newer strategies that address the equity volatility dilemma include minimum volatility equity funds, credit-focused unconstrained bond funds, and alternative strategies such as managed futures and option writing.
  • Because these strategies mitigate risk in different ways, it’s helpful to categorize them based on similar investment characteristics and the role they play in portfolio construction.
  • This paper introduces a comprehensive framework of three risk-mitigating categories, based on the desired investment objective: equity substitutes, equity complements and equity diversifiers.
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