Milliman Managed Risk Strategy — Frequently Asked Questions

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Does the Milliman Managed Risk Strategy use options?

No, the Milliman Managed Risk Strategy does not use options—instead, it utilizes exchange-traded futures contracts. Established in the early 1970s, financial futures contracts are agreements to buy or sell a financial instrument at a predetermined price in the future. The financial futures market is one of the most transparent and liquid markets in the world, and accounts for over US $1 trillion per day in contract value.

Historical risk strategies focused on establishing a floor on losses within a portfolio. This strategy works in a crisis, but we believe that a futures-based protection guidance is more cost-effective and secure, as well as a better fit for portfolios maintained across market cycles.

Is the Milliman Managed Risk Strategy comparable to shorting futures in a portfolio?

Brokers can undertake a future shorting strategy for a portfolio, but that strategy comes with risk management challenges. Other brokers are not in a position to manage risk at night when the Asian markets are open and may not be well situated to hit specific hedging targets. Our investment professionals operate from a global trading platform (Chicago, London, and Sydney) and monitor portfolio risk and react to changing market conditions on a 24-hour basis. In addition to managing overnight risk, the Milliman Managed Risk Strategy also targets a specific volatility level and has established infrastructure in place to manage the rebalancing and rolls of futures to maintain an accurate hedge against sustained market losses.

How does the Milliman Managed Risk Strategy address problems typically associated with portfolio insurance?

Portfolio insurance tries to replicate a short-term floor and requires frequent and sometimes excessive trading. Instead, the Milliman Managed Risk Strategy synthetically replicates an ever-green, longer-dated put option. Our strategy avoids a large amount of intra-day trading and the selling spirals that drive a bear market further down, while addressing other historical problems associated with portfolio insurance.

Historically, portfolio insurance suffers from reduced liquidity in times of market stress and an over-reliance on computerized trading models. Our strategy addresses liquidity issues by using the most liquid and most deeply traded futures markets, and we do not rely on computer models to execute trades. The experienced, global Milliman Financial Risk Management trading team can incorporate market factors into the decision making process that a computer model cannot.

Is the Milliman Managed Risk Strategy different from the methods that led to the 1987 market crash?

The main reason cited for the 1987 crash was portfolio insurance trading strategies and their reliance on computerized trading models, which caused a vicious cycle to ensue when models continued executing larger and larger short trades as the markets declined.

We believe the downfall was in the strategy model, which aimed to manage investments over short periods of time (one-year to three-year preservation periods). The Milliman Managed Risk Strategy seeks to provide guidance over a longer time horizon (10 years). Longer-term options do not require the same large rebalancing trades as the market declines.

Milliman also does not rely on computer models to execute trades, but on an experienced and global team of traders who can incorporate market factors into the decision making process that a computer model cannot.

How can I take advantage of the Milliman Managed Risk Strategy?

To learn more about the Milliman Managed Risk Strategy, please contact your Milliman consultant, or email us.


Issued by Milliman Pty. Ltd. (Milliman AU) (ABN51 093 828 418) (AFSL 340679) Please contact Milliman to obtain more information about the products and services we offer as not all products and services may be suitable for you.

The Milliman Managed Risk Strategy is available only to persons who meet the requirements for a "wholesale client" under the Corporations Act and trustees of superannuation funds with net assets of at least A$10 million (Clients). Clients must have an agreement with Milliman Pty Ltd ABN 51 093 828 418 AFSL 340679 (Milliman) to implement the strategy (Service) against a portfolio of the Client's equity investments (such as listed shares), which enables the Client to use the Service or to offer the Service to members of the Client's superannuation fund.

Milliman makes no recommendation and gives no statement of opinion to Clients, members of Clients' superannuation funds or their respective advisers in relation to use of, or any investments, in the Service. Before considering whether to use the Service, Clients may wish to obtain professional advice (including taxation advice). Investments in, the Service are subject to market and other risks, and no guarantee or assurance is given by Milliman that such investments will not give rise to losses or that performance of the Service will completely reflect inversely the performance of equities markets generally or a Client's portfolio of equity investments. While generally assets which are acquired through use of the Service will be liquid, this may not be the case in all circumstances. Further, during periods of sustained market growth, the return to Clients from the combination of their portfolio of equity investments and assets held in the Service should be less than if the Client did not participate in the Service. Fees and conditions apply to use of the Service.

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