The creative hedge

Rising volatility in the equity markets has caused banks and hedge funds to think hard about how to protect their portfolios in the most optimal, cost-effective way. With the cost of out-of-the-money index puts soaring, managers have had to look to more creative hedging strategies. By Wietske Blees

Hedge fund managers have had to endure a tricky few months. With equity markets plunging, volatility hovering close to recent highs and correlation on the rise, the across-the-board gains notched up by the hedge fund industry in 2006 have not been as easy to replicate. In this environment, portfolio insurance, once considered an unnecessary expense, has become increasingly important. But with rising volatility pushing the price of out-of-the-money index put options to prohibitively high levels