Ordinary Investors Can Outsource their Hedging and Derivatives Management through Annuities

Concerned about the possibility of another market swoon?

Take a look at some of the living benefits features that can be attached to most variable annuity products to hedge market risk and lock-in a floor of income.

How about inflation risk?

Buy a fixed annuity with inflation protection.

How about capturing a portion of the market upside while also having downside protection?

Consider a fixed indexed annuity and avoid having to become an expert in constant proportion portfolio insurance.

The reality is that annuities provide ordinary investors with access to highly sophisticated and efficient derivatives management.

This is because the insurance companies providing various annuity products will use large scale derivatives programs to create and manage the products. 

Ordinary investors benefit from the ongoing professional management of a derivatives portfolio and the price efficiency that is driven by the scale and buying power of a large insurance company.

The consistency and price efficiency offered through annuities would be difficult to replicate otherwise.  For example, Wall Street Journal columnist Brett Arends just wrote a piece about the use of put options (a derivative) to hedge or guard against a future decline in equities.

Creating and managing a derivatives program using put options may sound simple but it is not.  What if there is no put option for your stock, ETF or index?  What is the optimal amount to buy to hedge your downside exposure?  Who monitors the positions to roll them over when they expire (a long dated option is 2 years)? 

Also, take a look at the article to see some pricing associated with a few sample put options.  Not entirely inexpensive—particularly when compared to 50 – 150 basis points associated with many guaranteed living benefits.

Maybe annuities are a good way for the ordinary investor to essentially outsource the management of a very sophisticated derivatives program?  Not a bad option in what has been a terribly volatile capital market environment.    


Very good article! Great explanation of how complex derivatives are being used by insurance companies to hedge risk....


Did you read " Comments on Dr. McCann's Analysis Submitted as Part of NASAA's - comment Letter to the SEC, Dated Sptember 10, 2008" by Miguel A. Herce, Ph.D.

Very interesting evaluation report.... strongly encourage you to contact Dr. Miguael A. Herce.

Gene J. Wittstock