Market turbulence has a habit of exposing uncomfortable truths about investment strategies and markets.
The 2022 gilt crisis did not just shake government bond markets, it revealed hidden vulnerabilities in putatively defensive portfolios. The collapse of Silicon Valley Bank in 2023 reminded investors financial stability is more fragile than many assumed.
And in April 2025, when global equities plunged by more than 10 per cent within days following sweeping US tariff announcements before rebounding sharply on news of a 90-day pause, it underscored how quickly sentiment can shift.
These episodes are not outliers. Over the past 15 years, investors have weathered the after-effects of the 2008 financial crisis as well as the Eurozone debt crisis, the Q4 2018 equity sell-off, the COVID-19 crash, and the 2022 inflation comeback.
Each time, investors face a familiar dilemma: whether to stay invested through uncertainty, or reduce risk, often at the worst possible time.
How protected equities work
Protected equities are investment strategies that maintain exposure to equity markets while incorporating built-in downside protection. The aim is to allow investors to participate in market growth while seeking to limit losses during significant downturns.
The mechanics typically involve combining equity exposure with protective derivatives, most commonly, put options. When markets rise, the equity component delivers returns, minus the cost of protection. When markets fall sharply, the protective element aims to limit losses beyond a certain threshold.
For example, a protected equity strategy might seek to capture 70-80 per cent of market upside while limiting downside losses to 10-15 per cent over a given period, with the exact parameters depending on the specific strategy design.
The concept itself is not new — institutional investors including defined benefit schemes and insurers have used protected equity strategies for many years.
What has changed is their evolution for defined contribution (DC) platforms and wealth management, with structures specifically designed to meet the requirements of daily pricing, high liquidity, and platform accessibility.
Key challenges protected equities can solve
Protected equities can help address some of today’s most pressing investment challenges:
When markets fall, some investors flee to cash or less volatile investments, locking in losses and potentially missing the recovery. Protected equities can help mitigate this risk by smoothing returns, making it psychologically easier to remain invested during turbulent periods
For DC scheme members approaching retirement, protected equities offer a way to maintain growth exposure while managing volatility. Traditional lifecycle strategies gradually reduce equity exposure in the final 10 to 15 years before retirement, typically shifting into diversified growth funds (DGFs) or bonds. However, DGFs have often struggled to meet return expectations while charging materially higher fees than passive alternatives. Meanwhile, the diversification benefits of bonds have weakened, as seen when both equities and bonds were sold off simultaneously in 2022 and again in April 2025.
Sequence-of-returns risk — the danger that poor returns early in retirement can permanently impair retirement outcomes, is a key concern. By limiting severe losses during critical early years, protected equities help preserve capital when it matters most.
With the UK Government’s Mansion House Compact accelerating allocations to private markets, protected equities can offer a balance to the illiquid portfolio components. They provide daily liquidity and transparent pricing, helping schemes and investors manage rebalancing or redemption needs without disrupting longer-term holdings.
Types of protected equity strategies
Protected equity strategies come in different structural forms, each with distinct characteristics and trade-offs. Two broad categories include:
Each approach involves trade-offs between cost, complexity, transparency, and effectiveness.
Options-based strategies
These are the most common and may involve:
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Listed exchange-traded options, which offer standardisation, transparency, and liquidity.
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Over-the-counter options, which provide customisation but introduce counterparty risk and reduced liquidity.
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Total return swaps, which can deliver protection through a single counterparty swap arrangement, but often come with more complex set-ups and limited transparency for end investors, especially when it comes to fees.
Dynamic hedging strategies
These adjust protection levels based on market conditions and realised losses:
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Constant Proportion Portfolio Insurance adjust equity exposure based on a buffer above a floor value.
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Variable hedging adjusts protection levels based on market volatility or other indicators.
Risk-based approaches increase or decrease hedging based on quantitative risk metrics
Each approach involves trade-offs between cost, complexity, transparency, and effectiveness. Listed options-based strategies often provide the best balance for daily-valued portfolios requiring high liquidity and clear governance.
Points to consider
When evaluating if protected equity strategies are suitable for your client, several key factors should be taken into account:
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Investment horizon These strategies tend to work best over full market cycles to allow time for the protection mechanism to deliver their intended benefits.
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Structure Understanding how protection is implemented is essential to evaluate transparency, liquidity and counterparty risk.
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Record The manager’s experience and record matter enormously — implementing protection effectively requires deep expertise in options markets and risk management.
Phoebe Nguyen is head of UK asset management sales and Philipp Loehrhoff is head of multi asset solutions at Berenberg bank.