Dynamic Asset Allocation for Capital Preservation

As a senior portfolio manager at an investment firm, you are evaluating the market risk exposure of a client's multi-asset portfolio. The portfolio currently consists of 60% equities, 25% fixed income, and 15% alternatives. The recent geopolitical developments have led to increased market volatility, prompting discussions on hedging strategies. You aim to determine which approach is the most effective in preserving capital during market downturns while still providing growth potential.

The client is particularly interested in understanding how different risk management strategies can mitigate market risks without sacrificing long-term returns. The portfolio's beta is currently measured at 1.2, indicating higher volatility than the market. Additionally, the client expresses concerns about potential inflationary pressures affecting fixed income returns.

After analyzing various options, you present three potential strategies: forward contracts on the equity index, investing in Treasury Inflation-Protected Securities (TIPS), and employing a dynamic asset allocation strategy that systematically adjusts equity exposure based on volatility metrics. Which of the following strategies best addresses the client's objectives of capital preservation and growth potential?