Threshold CPPI

Constant Proportion Portfolio Insurance (CPPI) strategies offer capital protection with upside potential, but they come with a major weakness: using higher multipliers to boost performance greatly increases the chance of cash-lock when the portfolio falls far enough that it is forced entirely into cash and can no longer benefit from any market recovery. We introduce the Threshold CPPI, a simple enhancement to traditional CPPI that adjusts the exposure to the risky asset once the portfolio reaches a predefined threshold. This approach significantly reduces cash-lock risk while maintaining meaningful participation in market rebounds. Using a new metric designed to quantify cash-lock risk, we show that the Threshold CPPI not only lowers the cash-lock risk but also improves the Sharpe ratio relative to the Standard CPPI, especially in highly volatile markets.