A dynamic portfolio hedging model called constant proportion portfolio insurance is raising interest among some European institutional investors, particularly those in Germany.
The move is largely driven by the rising cost of buying derivatives such as put options to protect investment portfolios. As a result, institutional investors are taking a closer look at more old-fashioned ways of preventing heavy losses that rely on buying and selling of actual securities while still maintaining some exposure to potential market upswings, consultants and managers said. One important contender is constant proportion portfolio insurance, or CPPI, which was first introduced in the late 1980s.
“We do see an increase in interest for CPPI given the recent market developments,” said Philipp Orth, investment consultant at Mercer LLC based in Munich. “This is particularly true for regulated funds that need to secure a certain funding level.”
Mr. Orth and other consultants have not seen widespread support for CPPI, but the strategy is gaining attention amid unprecedented market volatility. In the past year, Mercer advised two German funds that each have several hundred million euros in assets under management in implementing a CPPI strategy, Mr. Orth said. He declined to name the clients. “CPPI allows (investors) to effectively lock in a certain funding level ... while at the same time securing a little bit of upside,” he added.
Separately WPV — a hybrid industry pension fund for certified public accountants based in Dusseldorf, Germany — has been using a CPPI strategy since the end of the previous bear market in 2003, sources familiar with the fund said. In 2008, the €1.2 billion ($1.5 billion) fund returned 3.6% at a time when many European pension funds reported heavy losses. Gianfranco Palumbo, WPV's head of investments, declined to be interviewed.