In a constant proportion portfolio insurance strategy (CPPI), what is the primary trading style?

In a constant proportion portfolio insurance strategy (CPPI), the primary trading style involves utilizing a systematic approach to manage the portfolio in order to both grow and protect its value. The strategy allows for increasing exposure to risky assets when the market is performing well, which is reflected in the choice that emphasizes buying winners in an up market. The concept of having a convex return curve is central to CPPI, as it aims to maintain a certain level of capital protection while still participating in market upside.

The mechanics of CPPI involve adjusting the allocation between risky assets and a risk-free asset based on a predetermined multiplier and the portfolio's cushion—essentially the difference between the current portfolio value and the floor value. When the market is up and the portfolio grows, the strategy allows for increased investment in equities, leading to higher potential returns, capturing the upward momentum.

This structure inherently creates a convex return profile due to the nature of the strategy: as gains accumulate, additional capital is allocated to riskier assets, resulting in the convex shape of the return curve that aligns with market conditions. Therefore, the emphasis on buying winners in an up market and achieving such a return profile is why this choice aligns with the fundamental workings of a CPPI strategy.