Iran, Geopolitical Event Risk and Portfolio Protection


The Iranian rocket attack on U.S. forces based in Iraq has sent markets into turmoil and investors racing for safety. The Dow Jones Industrial Average Futures fell more than 400 points immediately after the attack, but were able to recover thereafter. They were most recently down about 140 points with the S&P 500 and Nasdaq Composite futures following suit.


It’s a very classic risk off trigger to a market that has of late become increasingly overbought due to early signals of a potential economic rebound in the backdrop of a globally coordinated central bank stimulus. So far the markets have backed off a bit with investors waiting to see if this is it, or if there is any further escalation. President Trump was very clear that the U.S. would deliver a heavy handed response to any Iranian retaliation. Thus, going forward markets could deteriorate much further to account for a growing conflict as the potential closure of the Straits of Hormuz will severely disrupt oil supplies from the Middle East.


The Outcome would be that these exaggerated market moves will illustrate a classic case of event triggered uncertainty manifesting itself in the form of volatility in market indices. Markets can price known risks but they need to adjust to factors in new uncertainties. The larger the impact of uncertainty on the markets, the larger the downward adjustment. In response to the afterhours pullback in markets, the VIX volatility index and its levered counterpart, the UVXY, have jumped. The UVXY reached a high of 15.05 for a gain of 20.12% from this morning’s low, before settling at 14.6.


These developments stand to impact every investor portfolio directly exposed to market risk and not protected from such adverse market outcomes. As an investment manager, Hercules Investments differentiates itself through specialization in providing each of its investment strategies with market hedges – a form of insurance that protects portfolio performance from downturns caused by such external market shocks. With its deep expertise and demonstrated history in managing and monetizing market volatility, Hercules Investments constructs these hedges to automatically activate as the market starts to pull back, in an effort to minimize losses. The Hercules market-hedged portfolios can therefore outperform their competition not only from temporary pullbacks but also from corrections and bear markets.


Investors benefit from the full service investment management capabilities provided by Hercules Investments as their portfolios benefit from liquid investments that are actively managed to seek outperformance on a daily basis and protected from market downturns, all with the help of quantitative methods and models.