Gyrostat October Outlook: Beneath The Calm, The Cost Of Protection Rises

Even as global equity indices remain near record highs, the pricing of risk is shifting quietly beneath the surface. In the United States, volatility, measured by the VIX, continues to hover in the mid-teens to low-20s, with a wider range and short-term spikes over the past month. In Hong Kong, the Hang Seng Volatility Index (HVIX) has remained consistently higher, reflecting structurally greater market uncertainty. This divergence highlights a simple truth: risk may be universal, but its price is profoundly local.

When markets appear calm, behavioural risk often rises. Investors begin to assume that protection is unnecessary, precisely when it is most affordable.

With market protection still attractively priced, investors have an opportunity to reinforce portfolios before conditions inevitably turn. The cost of preparing today is far less than the cost of reacting tomorrow.

From a practical standpoint, protection costs differ significantly. A one-year, 10% downside floor on a U.S. equity index portfolio may currently cost around 2% of notional value, whereas an equivalent level of protection in Hong Kong could exceed 4-5%. This disparity illustrates that risk, while universal in concept, is priced locally based on liquidity, structure, and sentiment.

A Risk-Management Lens

True financial security comes not from predicting market direction, but from constructing portfolios that can withstand the unknown. Our approach views current conditions through a risk-management lens, building diversification and protection into portfolios by design. This proactive scenario planning reduces reliance on forecasts and helps address the 'sequencing of returns' risk that can devastate retirement balances if losses occur early in drawdown years.

We elaborate on this in detail, along with the limitations of financial theory as it applies to portfolio construction for lower-risk investors, in our recently published guide:

Risk Managed Investing: A Structured Guide from Accumulation to Retirement: https://www.gyrostat.com.au/news/risk-managed-investing/

Current Market Backdrop

With many equity indices trading near record highs, risk remains priced at or near historic lows. Volatility indices provide an accessible translation of how markets perceive and price uncertainty.

VIX - S&P 500 Implied Volatility

Source: Bloomberg / Google Finance (data as at 20 October 2025)

HVIX - Hang Seng Implied Volatility

Source: Bloomberg / Google Finance (data as at 20 October 2025)

Translating Volatility into Portfolio Protection Costs

The VIX index reflects the market's expectation of volatility-and by extension, the cost of protection. When volatility is subdued, protection is inexpensive; when volatility surges, the cost of cover rises sharply and availability narrows.

One way to translate this into practical terms is to express protection as a percentage of the portfolio value being insured. The cost depends on the chosen duration and the level of loss the investor is willing to tolerate before compensation begins.

S&P 500 Protection Pricing: Duration vs Excess

Source: Gyrostat analysis of S&P 500 option pricing (as at 17 October 2025)

Hang Seng Protection pricing: duration vs excess

Source: Gyrostat analysis of Hang Seng option pricing (as at October 2025)

For example, protecting a $1 million S&P 500 portfolio until 17 September 2026 with a 10% hard floor would cost approximately 2.0% ($20,000). The same protection in the Hang Seng Index until 29 September 2026 would cost roughly 4.4% ($44,000). Put simply, investors currently have the ability to secure meaningful downside insurance at unusually attractive levels, a window that often closes quickly once volatility returns.

Evidence of Resilience

Gyrostat's risk-managed strategies are designed to deliver peace of mind across conditions. The Class A has maintained a 14-year track record without a single quarterly drawdown beyond its 3% risk tolerance, while our leveraged Class B focuses more on returns and has a defined higher risk tolerance.

Absolute return equity income funds, such as Gyrostat, use proprietary systems to find the least expensive protection and adjust its duration and coverage as needed, a strategy called 'dynamic hedging'. This strategy is difficult for individual investors to execute efficiently on their own.

For cautious investors, swapping passive long-only equity exposure for risk-managed absolute return funds adds diversification beyond traditional asset splits. This isn't about shifting between growth and defensive assets, but rather about maintaining continuous protection against market volatility in all scenarios.

Outlook

Looking ahead, realised volatility is expected to rise, and the risk of large downside 'gaps' remains elevated. Investors face a choice: continue to rely on predictions or proactively construct portfolios that can withstand a wide range of outcomes, including significant market declines.

For retirees and conservative investors, the current tranquil market environment should not breed complacency. Instead, it constitutes a strategic opportunity to strengthen long-term financial stability.

Gyrostat Capital Management prepared this document and it is intended only for Australian residents who are wholesale clients (as defined in the Corporations Act 2001). To the extent any part may be perceived as financial product advice, it is general advice only and has been prepared without taking into account of the reader's investment objectives, financial situation or needs. Anyone reading this report must obtain and rely upon their own independent advice and inquiries. Investors should consider the Product Disclosure Statement (PDS) relevant to the Fund before making any decision to acquire, continue to hold or dispose of units in the Fund. You should also consult a licensed financial adviser before making an investment decision in relation to the Fund. One Managed Investment Funds Limited ACN 117 400 987 AFSL 297042, is the responsible entity of the Fund but did not prepare the information contained in this document. While OMIFL has no reason to believe that the information is inaccurate, the truth or accuracy of the information in this document cannot be warranted or guaranteed.