On Monday, in the autumn of 1987, the Down Jones industrial average decreased more than 20%. That event was marked as Black Monday, and is one of the most infamous in the last decades. By the end of the month, almost all major exchanges had declined more than 20%. There are many interpretations what caused Black Monday massive drop. Some specialists say that a principal role was played by portfolio insurance trading rules. More than $80 billion of assets were related to these rules, where put options had been unnaturally produced in the market.
However, Black Monday’s massive drop of the Down Jones industrial average could not be related to any single news event because any major events were released during the weekend. One week before the crash the market went down by 10% with the biggest change on the Friday afternoon before the Black Monday. Almost $12 billion of index futures and equity sales were recognized during this decline. Three portfolio insurers made 10% of all sales on the New York Stock Exchange and almost 22% of all sales in index futures markets. Such sales of alternative investment management products had been mostly executed by investors and traders other than portfolio insurers. On Black Monday the market declined so fast that caused congestion of the stock exchange systems. Many participants including portfolio insurers were unable to execute trades and failed to attain protection they needed. Of course, the usage of portfolio insurance products has decreased notably since 1987. It has been broadly discussed what caused this crash, and most agree that Black Monday appeared due to the mass panic escalated between all participants of the market. SInce 1987 other protective mechanisms have been developed and used known as circuit breakers or trading curbs.
When you want to protect your alternative investment management strategies it is worth to consider several different hedging strategies and do not follow the one used by the most participants in the market.