| Summary: | Portfolio Insurance is the name given to a wide variety of asset allocation strategies used to control investment risk in portfolios of various asset classes. Portfolio insurance provides downside protection without limiting the potential for upside gains. The success of domestic portfolio insurance strategies, however, may not indicate its benefits in international asset management. Foreign financial markets have different market structures which may not be suitable for the implementation of portfolio insurance strategies. This study, therefore, has attempted to establish the facts about the market structures, to discover the differences among the markets, and to analyze the effects of different market structures on the implementation and the costs of portfolio insurance. Market volatility and futures mispricing that crucially affect the implementation and performance of the international portfolio insurance programs are examined. The costs of two option based portfolio insurance strategies (put-protected and dynamic hedging) as well as a non-option based strategy (Constant Proportion Portfolio Insurance) have been assessed and analyzed under historical and simulated market conditions. The impact of the strategic decisions (e.g., the protection horizon, the floor return, and the rebalance interval) on the costs of alternative strategies is also analyzed. The empirical results show that although the Japanese and Hong Kong markets have been more volatile than the U.S. and the futures mispricing more persistent, the costs of alternative portfolio insurance strategies were not prohibitive for the periods tested. Generally, the cost of the 3-year program was less than that of the 1-year program. Moreover, for the long-run simulations the Constant Proportion Portfolio Insurance strategy outperformed the market for the periods examined.
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