A Volatility Chart

Defensive Equity

This strategy aims to outperform the S&P 500® Index over a full market cycle with approximately 40% less volatility and more predictable outcomes than traditional factor-based low volatility strategies. The strategy is expected to exhibit a long-term equity market beta of 0.5.

Strategy Goals: Smoother Ride to Equity Markets

The Parametric Defensive Equity (DE) strategy aims to outperform by following a different path to low volatility equity.  It seeks to structurally reduce equity market risk, while adding a relatively uncorrelated risk premium to enhance returns.  It is expected that this tradeoff over the long term will lead to a smoother ride along the way and more predictable outcomes. In addition, it seeks to reduce the magnitude of drawdowns and recover faster from stress events.

Portfolio Construction: Harvesting the Volatility Risk Premium

DE portfolios are constructed and managed to capitalize on the equity "volatility risk premium" that has historically been embedded in equity index option prices. DE creates implicit downside protection through a core asset allocation that is split between equity and U.S. Treasury Bills.

Investment Cases

Clients utilize DE within their asset allocations in several ways including:

  • as a complement higher risk equity strategies
  • as a replacement for traditional hedged equity strategies 
  • to provide an additional component within the marketable alternatives bucket, and 
  • as a potential “alpha source” that can be transported to other assets when managed on an “options-only overlay” basis

Investment Thesis

Equity Index options have historically traded with an embedded Volatility Risk Premium (VRP) and we expect this to continue.

  • Options may be thought of as financial insurance contracts – insurance is not free
  • Option prices contain a volatility risk premium paid by option buyers to option sellers

 A defensively structured portfolio can capture the VRP by selling fully-collateralized options without introducing leverage.


Defensive Equity is offered by Parametric Investment & Overlay Strategies.  For additional information please visit the Disclosure page.

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