Journal of Investment Strategies

Portfolio insurance with adaptive protection

François Soupé, Thomas Heckel and Raul Leote de Carvalho

  • This article investigates the design of strategy with capital protection at a specific maturity
  • Protection should not always be set at 100% of capital invested
  • The optimal protection depends on the level of interest rates
  • Protection should be increased over time if the cushion becomes larger than a predefined cap


The appetite for funds with capital protection has been increasing in recent years. This paper investigates the optimal design of such funds, which provide capital protection at a specific maturity. Capital protection is often set at 100% at inception for simplicity's sake, but without any clearer rationale. We propose a framework for estimating the optimal level of protection or, equivalently, the optimal level of the cushion that maximizes investor utility while taking into account the aversion of that same investor to risk or loss. The optimal management rule that we call portfolio insurance with adaptive protection offers the right trade-off between upside potential and capital protection at the maturity. Under this strategy, the cushion is capped at a predefined level. Should the cushion increase too much, the upside potential would become very large - too large compared with the protection at maturity. Higher utility would then be obtained by increasing the protection rather than letting the cushion drift higher. Initial protection should therefore be above/below 100% for high/low interest rates and protection should be increased over time if the cushion becomes larger than the predefined cap.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here