IT MUST BE tough to be fingered as one of the main culprits for the biggest stock market crash in history. Hayne Leland appears to have borne the experience well.
'I [went] from being somewhat of a hero to somewhat of a goat,' the famed finance professor said, smiling wryly as he relaxes in the hotel lounge.
Mr Leland invented 'portfolio insurance', blamed by the Brady report into the 1987 stock market crash for causing a self-perpetuating downward spiral of selling on Black Monday, October 19. The Dow Jones industrial average fell 22.62 per cent or 508 points that day, a record one-day decline.
It was an ignominious reversal for a brilliantly simple investment strategy that for years had worked flawlessly.
Investors have long searched for the holy grail of investing: a way of making money when prices rise without running the risk of losing when they fall. Mr Leland seemed to have discovered the answer, hitting on the idea during a sleepless night in September 1976, according to the book Capital Ideas by Peter Bernstein.
Puzzling over how to insure a portfolio against declines, Mr Leland, then a 35-year-old professor at the University of California, Berkeley, realised that a put option worked identically to an insurance policy. For a small premium, it protected the investor against a fall in an asset's value.
A put option gives the holder the right to sell an asset at a certain price. Its value rises as the asset's value falls. If an investor buys a put option on his portfolio, therefore, any drop in its value is offset by a corresponding gain in the put option.