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The Journal of Alternative Investments

The Journal of Alternative Investments

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Article

Risk and Return of Equity Index Collar Strategies

Roni Israelov and Matthew Klein
The Journal of Alternative Investments Summer 2016, 19 (1) 41-54; DOI: https://doi.org/10.3905/jai.2016.19.1.041
Roni Israelov
is a managing director at AQR Capital Management in Greenwich, CT.
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  • For correspondence: roni.israelov@aqr.com
Matthew Klein
is an associate at AQR Capital Management in Greenwich, CT.
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  • For correspondence: matthew.klein@aqr.com
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Abstract

Equity index collar strategies are often perceived as a way for investors, at little to no cost, to exchange some upside exposure for reduced losses on the downside. That perception may be accurate if one considers only the net dollar cost of the strategy’s initial option trades, but it fails to account for the significant drag the collar may impose on returns. The authors decompose the equity index collar’s returns to show that it is expected to have lower returns than its underlying index, primarily because it earns less equity risk premium. Additionally, collars that are net long volatility exposure may further reduce expected returns because they pay out volatility risk premium. The authors then compare the collar to other ways of obtaining equity exposure with reduced downside risk. The analysis shows that not only has the collar strategy historically performed poorly relative to these alternatives, but it should underperform in expectation as well.

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The Journal of Alternative Investments: 19 (1)
The Journal of Alternative Investments
Vol. 19, Issue 1
Summer 2016
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Risk and Return of Equity Index Collar Strategies
Roni Israelov, Matthew Klein
The Journal of Alternative Investments Jun 2016, 19 (1) 41-54; DOI: 10.3905/jai.2016.19.1.041

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Risk and Return of Equity Index Collar Strategies
Roni Israelov, Matthew Klein
The Journal of Alternative Investments Jun 2016, 19 (1) 41-54; DOI: 10.3905/jai.2016.19.1.041
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  • Article
    • Abstract
    • CONSTRUCTING A COLLAR
    • COLLAR PERFORMANCE
    • COLLAR PERFORMANCE ATTRIBUTION
    • PATH DEPENDENCE
    • POTENTIAL COLLAR BENEFITS
    • COLLAR ALTERNATIVES
    • BLACK SWANS
    • CONCLUDING THOUGHTS
    • ENDNOTES
    • REFERENCES
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