Risk control

Jürgen Vandenbroucke of the Faculty of Applied Economics at the University of Antwerp and KBC Asset Management elaborates on risk control applied to option-based capital-protected products and rules-based portfolio insurance. Vandenbroucke argues that in both cases the addition of risk control may increase commercial appeal. However, risk control applied to the underlying of option-based structured products merely shifts vega risk from the option seller to the option buyer. Adding risk control to the risky asset of rules-based portfolio insurance does not alter the portfolio allocation if, for good reasons, market exposure is already inversely linked to volatility. While risk control may add an appealing flavour, it is shown not to change the recipe

The financial crisis has led both institutional and private investors to favour remedial actions that flatten the fluctuations in their portfolio values. Portfolio construction and management techniques such as risk parity and minimum variance have gained popularity as a result. This article focuses on volatility targeting or risk control, another member of the risk awareness family. 

A first section highlights the main features of volatility targeting. We next illustrate how risk control fits