EP (Equity Protect)
Equity Protect (EP) uses hard stops, hedges, or drawdown caps to safeguard investor capital and limit losses in equity portfolios.
What Is Equity Protect (EP)?
Equity Protect (EP) refers to capital preservation mechanisms designed to safeguard investor equity by embedding strict risk controls, such as hard stops, hedging strategies, or drawdown caps, directly into a portfolio’s structure or mandate. The primary aim is to limit downside risk and prevent catastrophic losses, especially during periods of market stress or volatility.
How Does Equity Protect (EP) Work?
EP strategies typically combine several risk management tools. Hard stops automatically halt trading or trigger asset liquidation if losses breach a predefined threshold. Hedges, like put options or inverse ETFs, offset potential losses when markets fall. Drawdown caps ensure the portfolio cannot lose more than a set percentage from its peak value. These mechanisms are often built into trading systems or fund mandates, monitored in real time, and enforced automatically to ensure discipline and transparency.
Why Is Equity Protect (EP) Important for Investors and Fund Managers?
Equity Protect is vital for investors and fund managers aiming to:
Preserve capital during sharp market downturns
Meet institutional risk mandates and regulatory requirements
Build trust with allocators by demonstrating robust risk controls
Reduce emotional decision-making and maintain investment discipline
By limiting losses, EP can help investors stay invested and avoid panic selling during volatile periods.
Example: Equity Protect (EP) in Practice
A hedge fund employs Equity Protect by setting a hard stop at a 10% drawdown from the portfolio’s peak. If the portfolio value drops by 10%, all positions are liquidated, and the portfolio moves to cash. In another case, a pension fund uses put options to hedge against market declines, ensuring losses do not exceed a predefined level, regardless of market conditions.
When Should You Use Equity Protect (EP)?
Equity Protect is most relevant:
When managing institutional or high-net-worth portfolios with strict risk limits
During periods of heightened market uncertainty or after strong equity rallies
For investors seeking to participate in equity upside while capping downside risk
Whenever capital preservation is a core investment objective
