Anil Khuman and Nick Constantinou How does CPPI perform against the simplest guarantee strategies ? June 2009

Capital protected structured products are popular with both investors and investment banks. A number of strategies ranging in complexity and cost exist that provide a minimum guaranteed payoff at maturity. In this paper the performance of Constant Proportion Portfolio Insurance (CPPI), a major strategy in the market, is evaluated against two simple strategies: a risk-free and a gapless investment. The CPPI strategy is general, allowing for discrete monitoring of trading ranges, ratchet features and leverage constraints. The risky asset is modelled as an asymmetric GARCH process. The CPPI’s performance against these simple strategies is found to be inferior in the majority of cases and deteriorates further with the inclusion of management fees and costs. Moreover, under various risk adjusted performance ratios the CPPI is dominated by the simple gapless (buy-and-hold) strategy.