Risk-Managed Equity Exposure

Can we de-risk market downturns?

February 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Risk management overlays tend to reduce stock market returns
  • However, they also can reduce drawdowns and increase Sharpe ratios
  • Given that diversification has become more difficult, these are becoming more relevant


It is tough to have high return expectations for stocks for the coming years. Stocks may go up in the short-term, but over the long-term, returns are primarily a function of valuations, which are at record-highs. Worse, the long-term outlook for economic growth is low to negative in most countries due to poor demographics and rising debt levels, which are not supportive of the earnings growth of public companies. The future is bleak (try Finominal’s Return Predictor for expected returns).

However, having zero exposure to global equities does not seem like a sensible solution as valuations of all asset classes, public as well as private, are at extremes. Nothing is cheap and as often stated, there is no alternative. A high cash allocation is not advisable with moderate inflation as it implies a negative real return.

Perhaps, an equities allocation can be combined with a risk management overlay that focuses on reducing drawdowns and generating higher risk-adjusted returns. Investors have a large number of tactical asset allocation models at their disposal and we will evaluate one of the most famous and simplest of all – the 200-day trend – in this research note.


Buy-and-hold has worked well in the US over the last few decades, but not without major hiccups. The global financial crisis in 2009 tested the most hardened investors. In other markets, buy-and-hold was not a viable strategy for most investors. The most well-known example is likely Japan, where the stock market went sideways in the three decades between 1990 and 2021.

Although the Japanese stock market recently surpassed its previous peak from 1990, Japan will lose 16% of its population, a full 21 million people, due to negative demographics over the next 30 years according to the UN. It is difficult seeing how this can be positive for Japanese stocks (read