Portfolio insurance is a method of hedging a portfolio of stocks against the market risk by short selling stock index futures.
This hedging technique is frequently used by institutional investors when the market direction is uncertain or volatile. Short selling index futures can offset any downturns, but it also hinders any gains.
Portfolio insurance is an investment strategy where various financial instruments like equities and debts and derivatives are combined in such a way that degradation of portfolio value is protected. It is a dynamic hedging strategy which uses stock index futures. It implies buying and selling securities periodically in order to maintain limit of the portfolio value. The working of portfolio insurance is akin to buying an index put option, and can also be done by using listed index options.
The technique, invented by Hayne Leland and Mark Rubinstein in 1976, is often associated with the October 19th, 1987 stock market crash.
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