Atlantic House Annual Investment Conference round up

Building resilient portfolios in an era of persistent uncertainty

A clear theme emerging repeatedly in conversations with investors is the growing need to make investment portfolios more resilient without abandoning risk altogether. Equity markets continue to push higher, fuelled by optimism around artificial intelligence and resilient corporate earnings. Yet beneath this surface strength lies a more complex backdrop: geopolitical fragility, shifting global alliances, and the ever-present risk of sudden market dislocations. In this environment, the question for investors is no longer simply how to generate returns, but how to do so in a way that can withstand a broader range of scenarios.

One of the most prominent innovations addressing this challenge is the rise of defined outcome investments. These strategies, which have gained significant traction in the United States through “buffer ETF” structures and are now expanding in Europe, aim to reshape the distribution of investment returns. Rather than seeking unlimited upside, they trade away a portion of less probable outsized gains in exchange for reduced downside exposure. The result is a more controlled return profile, designed to deliver a defined outcome across a wider range of market conditions.

At the core of these strategies are two persistent sources of return: the equity risk premium and the volatility risk premium. The equity risk premium reflects the additional return investors receive over the risk-free rate for bearing equity market risk, which is also accessible through derivatives linked to major indices. The volatility risk premium arises from the tendency for implied volatility— defined as market expectations of future volatility embedded in option prices—to exceed realised volatility over time. By systematically harvesting these premia, defined outcome strategies seek to create more stable return paths.

A key feature of these products is their flexibility. Investors can adjust parameters such as capital protection levels and autocall barriers, balancing downside protection against potential return. Time horizon also plays a crucial role. Evidence suggests that a six-year tenor often represents an optimal balance: long enough to allow markets to recover from drawdowns, but not so long that investors are exposed to repeated cycles of volatility.

This structured approach appeals to investors seeking a tighter distribution of outcomes compared with traditional equity markets. Scenario analysis often shows a more predictable investment journey, which investors often find worth giving up some upside in strong bull markets. In a higher interest rate environment, the pricing of these strategies has also become more attractive, further enhancing their appeal.

Alongside defined outcome investing, attention is also turning to quantitative investment strategies (QIS) and alternative risk premia. These systematic approaches aim to manage risk and enhance returns through rules-based frameworks rather than discretionary decision-making. A key insight from practitioners is that investor behaviour itself can be a major source of risk. When portfolios experience sharp losses, investors often react emotionally, selling at the wrong time or abandoning long-term plans. Systematic strategies can help mitigate this behavioural risk by maintaining discipline through market cycles.

However, debates remain around flexibility versus rigidity. While systematic approaches may never achieve perfect outcomes, they can deliver consistently “good enough”  results by adhering strictly to data-driven rules. The challenge lies in avoiding overfitting, where strategies perform well in historical backtests but fail in real-world conditions. Robust design and careful understanding of underlying data are therefore essential.

Market structure is also evolving. The rise of short-dated options, particularly among retail investors, has created new dynamics and opportunities for systematic strategies to exploit mispricings and volatility patterns. At the same time, traditional indicators such as the VIX are becoming less straightforward as measures of fear, with broader factors such as positioning and “fear of missing out” playing a larger role.

Tail risk protection has become another focal point for investors concerned about extreme market outcomes. With equity valuations elevated and correlations between stocks unusually low, the risk of sudden market dislocations remains underappreciated. Traditional diversifiers such as bonds and gold have also become less reliable as a consistent hedge, sometimes failing to provide the expected protection.

While buying equity put options can offer direct protection, it is often costly. This has driven interest in QIS-based hedging strategies which aim to provide more efficient downside protection. The challenge lies in selecting and combining strategies effectively. A structured framework that categorises strategies by characteristics such as convexity, cost, and reliability can help build diversified hedging portfolios tailored to investor objectives.

These approaches are increasingly being integrated not just as standalone hedges, but as part of broader portfolio construction. Tail risk strategies can act as return drivers, defensive overlays, or complements to existing allocations, reflecting their versatility in modern portfolio design.

Finally, the broader geopolitical backdrop reinforces the importance of resilience. The global order established after 1945 is undergoing significant strain. The United States is increasingly willing to use its financial and technological dominance as a strategic tool, while China continues to reduce its dependence on Western systems. Key sectors such as semiconductors, energy, and artificial intelligence are now deeply intertwined with geopolitical competition.

In this environment, traditional assumptions about global stability are being challenged. Yet rather than signalling outright pessimism, this shift underscores a more nuanced reality: volatility itself is becoming a permanent feature of the investment landscape. For portfolio managers, the challenge is no longer just about maximising returns, but about constructing portfolios capable of surviving, and adapting to, a world defined by persistent uncertainty.