The Risk of War With Iran And The Need To Built-in Protection to Investor Portfolios

President Trump gives a speech after Iran attacked US military bases in Iraq

Hercules Investments’ new research on the prospects of war with Iran and what that could do to investors portfolios

Ever since the US drone strike in Iraq killed Iran’s top military leader, the question in everyone’s minds is, “could this lead to war between the US and Iran?” After the rocket attack by Iran on U.S. forces based in Iraq has sent markets into turmoil and investors racing for safety. Prior to the attack, President Trump was very clear that the U.S. would deliver a heavy handed response to any Iranian retaliation. After that, however, President Trum appears to have averted escalating the confrontation and the risk of an all-out war has diminished.

The seeds of the current crisis weren’t planted through this week’s attacks alone. The US and Iran remain locked in a long standoff that continues to escalate. The US imposed sanctions on Iran’s economy over its growing missile program (after withdrawing from the 2015 nuclear deal last year) and increasingly engaging in acts of terrorism. With Iran’s leadership vowing to avenge the assassination of its commander, this round of intensification has left US-Iran relations teetering on a knife edge, with little needed to knock them off. In this charged situation, the catalysts or accidental miscalculations to trigger a war are many.

The markets could deteriorate much further in reaction to a closure of the Straits of Hormuz which would severely disrupt oil supplies from the Middle East or a bombing of a US tanker. Iranian-linked insurgents could target and kill American troops or diplomats in Iraq or engineer a limited attack on US soil. In the absence of calibration and potential for mistakes, any such event could open the door to full-scale military engagement.

Impact on an Investment Portfolio

These events caused the equity markets to briefly panic in the afterhours, a classic case of event triggered uncertainty manifesting itself in the form of volatility in market indices. Markets can price known risks but they need to adjust to factor in new uncertainties. The larger the impact of uncertainty on the markets, the larger the downward adjustment. Yesterday, the VIX volatility index and its levered counterpart, the UVXY popped. The UVXY reached a high of 15.05 for a gain of 20.12% from this morning’s low, before settling at 14.6.

In a larger context, this move was minor and led to no follow through. But in the scenarios highlighted above any significant loss of lives or destruction of economic targets could signal the potential of larger uncontrolled losses ahead as investors fail to predict estimate future outcome. History shows, such situations have led to double-digit equity market pullbacks and a concurrent spike in the VIX volatility index to 40+.

These developments stand to impact every investor portfolio directly exposed to market risk and not protected from such adverse market outcomes.

The Vital Role of Portfolio Protection

Crisis situations like these should prompt every investor to ask a key question:

Is it incumbent upon us investors to initiate corrective action to protect our externally managed portfolios from losses or is our compensated investment manager rightfully doing it for us.

As an investment manager, Hercules Investments differentiates itself through specialization in providing each of its investment strategies with market hedges – a form of insurance that protects portfolio performance from downturns caused by such external market shocks. With its deep expertise and demonstrated history in managing and monetizing market volatility, Hercules Investments constructs these hedges to automatically activate as the market starts to pull back, in an effort to minimize losses. The Hercules market-hedged portfolios can therefore outperform their competition not only from temporary pullbacks but also from corrections and bear markets.

Investors benefit from the full service investment management capabilities provided by Hercules Investments as their growth-oriented portfolios benefit from liquid investments that are actively managed to seek outperformance on a daily basis, all with the help of quantitative methods and models. These all-weather strategies fully participate in uptrending markets while being protected from market downturns from a variety of adverse events and environments including the current one.