Managing cash-in risk embedded in Portfolio Insurance strategies: a review

Aportfolio insurance strategyis a dynamic hedging process aiming to limit downside risk duringa market downturn and allow investors to obtain equity market participation in the upside market.The biggest potential risk of implementing a portfolio insurance strategy is the so-calledcash-inrisk, i.e., the risk that the underlying asset registers huge drops before the portfolio can be rebal-anced. In such cases, the value of the insured portfolio would fall below the floor (the insuredcapital), and the consequence is that the portfolio is fully monetized, not allowing the investor torecover the capital initially invested. First, this paper reviews the main properties of the most usedallocation algorithm, the so-calledConstant Proportion Portfolio Insurance(CPPI), and how thecash-in risk affecting this kind of allocation strategy can be modelled and hedged. Secondly, itdescribes the main extensions of CPPI proposed in the literature to improve its capability to re-duce cash-in risk