Resilient Investing in a Fragmented Financial Order

Executive Summary

Heightened geopolitical tensions and the increased use of financial sanctions have elevated sovereign and private sector interest in asset resilience. This note examines strategies to mitigate confiscation and counterparty risks through a comparative analysis of uncensorable assets, traditional custodial securities, and derivative-based overlays. It evaluates the historical trade-offs between safety and returns, and proposes a resilient portfolio construction for sovereign and private sector asset holders that seeks to balance tail-risk protection with long-term market exposure. In a fragmenting global financial system, sovereignty-aware asset allocation is increasingly vital.

1. Non-Custodial Assets: Minimizing Counterparty and Jurisdictional Failure Points

The 2022 immobilization of certain official sector assets underscores the vulnerability of traditional custodial holdings to jurisdictional actions. "Uncensorable" assets—those that permit direct physical or digital possession—can reduce reliance on third parties that may be subject to external institional change such as financial repression or secondary sanctions.

Assets amenable to secure, sovereign storage include:

• Gold: A historically significant store of value. Physical bullion stored in private vaults, domestically or in neutral jurisdictions, is the oldest store of value, though it entails storage and insurance costs. For non-sovereign investors, Gold’s role is tempered by precedents of financial repression, such as the EO6102 requiring private surrender in the US.
• Other Precious Metals: Platinum, silver offer diversification but involve higher transactional frictions. Costs arise from assay verification (typically 0.1–0.5% of value) and potential material loss during recasting (1–2%). Lower value density (silver) and market illiquidity (Platinum) present further limitations.
• Cryptocurrencies: Digital assets enabled by distributed ledger technology allow for self-custody via cryptographic keys. Their security models vary: Proof-of-Work (PoW) systems rely on computational expenditure but may face regulatory pressure due to energy intensity. Proof-of-Stake (PoS) systems depend on staked economic capital, which risks centralization through staking pools. Privacy-enhancing cryptocurrencies obfuscate the transaction graph from third parties and malign actors but attract heightened off-ramp regulatory scrutiny.
• Bearer Securities: Once instrumental for anonymous capital transfer—constituting a notable share of global securities around 1918—these instruments have been systematically phased out. Regulatory actions, such as the U.S. Tax Equity and Fiscal Responsibility Act of 1982 and subsequent global anti-money laundering standards, curtailed new issuance. Remaining legacy instruments are largely non-fungible and diminishing in relevance.

While prioritizing holder sovereignty, these assets often entail higher transactional costs, lower liquidity, and historically lower financial returns compared to traditional securities.

2. Custodial Securities: Bonds and Equities dependent on Jurisdiction

Conventional bonds and equities benefit from deep markets and have delivered robust long-term returns but are inherently exposed to the institutional and jurisdictional risks of their custodial chains. Legal precedent and recent sanctions regimes provide clear examples.

Modern Precedent: Freezes and Custody-Chain Contagion Major international custodians are conduits for both value and jurisdictional authority. For instance, many non-Russian investors held Russian equities via American Depositary Receipts (ADRs) or ETFs. Following the 2022 sanctions, the entire settlement chain—from the investor's broker, through the Western custodian (e.g., Euroclear), to the correspondent Russian bank—faced immobilization. Each link represented a potential point of total capital freeze.

Major international custodians include:

• Depository Trust Company (DTC, U.S.): Custodied assets exceeded $100 trillion in 2025 (source: DTC annual report).
• Euroclear and Clearstream (Europe): Combined assets under custody surpassed €42 trillion in Q3 2025 (source: Euroclear/Clearstream disclosures).
• China Securities Depository and Clearing Corporation (CSDC): Domestic custody is estimated in the range of RMB 16–20 trillion (~$2–3 trillion) as of 2025, integrated into broader SAFE external debt data.

Long-Term Returns and Historical Context Long-term return data from sources such as Dimson, Marsh, and Staunton illustrate the potential opportunity cost of forgoing traditional securities, but these figures mask significant historical shifts in monetary regimes.

• Global Equities achieved annualized real returns of approximately 5–6% over 1900–2024.
• Sovereign Bonds yielded 1–2% in real terms over the same period. These aggregate returns span distinct epochs, from the pre-1914 era of gold-convertible promises to the post-1971 fiat era following the complete suspension of dollar-gold convertibility.
• Gold, in contrast, provided modest real returns, often near or below 1% annualized.

This trade-off has historically led some institutional holders, including certain central banks in the 1990s and 2000s, to reduce gold allocations in favour of higher-yielding securities.

3. Derivative Markets as a Strategic Overlay

Derivative contracts can provide synthetic exposure to asset returns while mitigating direct custodial risk, serving as a bridge between the security of physical possession and the return potential of financial markets. The scalability and margin efficiency of these instruments vary significantly.

Exchange-Traded Futures (e.g., CME Group): Standardized contracts allow efficient economic exposure. Key considerations include contract size, position limits, and margin efficiency.

• Key Contracts & Scalability:
• E-mini S&P 500 (ES): 50 x index (~$260,000 notional). Position limits are very high, supporting massive institutional scale.
• U.S. Treasury 10-Year Note (ZN): $100,000 face value/contract. Position limits similarly accommodate large institutional portfolios.
• Gold (GC): 100 troy ounces (~$230,000 notional). Position limits are substantial but lower than for major equity index or Treasury futures, reflecting the relative depth of the underlying physical market.
• Micro E-mini S&P 500 (MES): 5 x index (~$26,000 notional), providing accessible sizing for smaller portfolios.
• Bitcoin (BTC): One contract represents 5 BTC. With Bitcoin at ~USD60,000, the notional value is ~USD300,000. Importantly, due to its high volatility, the initial margin requirement for one BTC futures contract is typically 35-50% of notional (often exceeding $100,000), making it a prohibitively capital-intensive vehicle for a long-term synthetic overlay compared to equity or gold futures, where margins are typically 3-10%.
• Mechanics: Trading occurs in whole contracts. Margin requirements vary by volatility, and counterparty risk is transferred to the central clearing house.

Over-the-Counter (OTC) Swaps: Instruments like Total Return Swaps (TRS) enable parties to exchange the economic return of an asset for a financing rate, creating synthetic positions that bypass the custody chain.

• Contract Size & Scalability: TRS are bespoke. Minimum notional sizes typically start at USD5 million to 10 million. Maximum size is constrained by the counterparty's credit appetite; for major equity indices or sovereign bonds, transactions in the hundreds of millions or billions are common.

These instruments facilitate risk transfer and portfolio customization but require careful management of counterparty credit risk, collateral requirements, liquidity, and basis risk.

4. Risks and Limitations of the Derivative Approach

While derivatives offer powerful synthetic exposure, they introduce distinct risks that must be carefully managed:

• Counterparty and Clearing Risk: While exchange-traded futures transfer counterparty risk to the central clearing house, the solvency of that clearing house becomes a critical, concentrated risk. OTC swaps retain bilateral counterparty risk.
• Liquidity and Basis Risk: In a market crisis, liquidity for derivatives can evaporate, causing spreads to widen and making it costly or impossible to adjust positions. Basis risk—the mismatch between the derivative contract and the underlying asset's performance—can lead to unexpected losses.
• Regulatory and Jurisdictional Risk: Derivative markets themselves operate within specific jurisdictions (e.g., CME in the United States). They are subject to their own set of rules, including the potential for emergency trading halts, forced liquidations, or changes to margin rules that could destabilize a strategy.
• Operational Complexity: Maintaining a derivatives overlay requires ongoing management for rolling contracts, monitoring margin, and managing collateral, introducing operational overhead and potential for error.

5. A Resilient Portfolio Framework for Asset Owners

For investors seeking to mitigate extreme tail risks without fully abandoning market returns, a structured derivative overlay can separate the resilience of an asset from its economic return. The practical implementation is a function of portfolio scale.

Implementation Pathways by Investor Scale:

• Portfolios from ~USD1 million to 100 million: The most efficient path is via centrally cleared futures contracts (e.g., CME).
1. Establish a core, self-custodied resilient position in a tangible asset like physical gold.
2. Execute an offsetting short position in gold futures (GC) combined with a long position in equity index futures (e.g., ES/MES).

This approach benefits from deep liquidity, low costs, and central clearinghouse risk management.

• Portfolios from ~USD100 million to several billion: At this scale, executing via standardized futures may encounter market impact. The progression is to a bespoke Total Return Swap (TRS) with investment banks.
1. Hold the physical resilient asset.
2. Enter a TRS, paying the total return on gold (or a funding rate) and receiving the total return on a specified equity index.

This customizes notional size and term, with pricing, collateral, and credit limits as key negotiation points.

• Sovereign-scale portfolios (e.g., exceeding hundreds of billions): The capacity of private derivative markets is inherently limited at this magnitude, posing market distortion and counterparty concentration risks. Effective implementation would likely require a bilateral, institutional arrangement outside private markets, such as a dedicated swap facility with a relevant central bank or another sovereign entity, echoing historical precedents like gold swaps between central banks.

Strategic Rationale: The framework aims to preserve a claim on the long-term equity risk premium while maintaining a non-counterparty, jurisdictionally resilient asset base. The cost of holding the low-yielding asset is the effective insurance premium. For futures-based implementations, the maximum potential loss in a severe dislocation is theoretically contained to the initial margin requirement.

6. Historical Context & Modern Enablers

The Historical Dilemma: Yield and Resilience Historical asset returns must be understood as a choice between yield and resilience. Productive, high-yielding assets—such as freehold land, domestic equity (e.g., shares in the Dutch VOC), or foreign custodial holdings—could deliver substantial real returns (~5% or more over long periods), but their dependence on jurisdiction made them vulnerable to wars and revolutions, leading to destruction, nationalization, or immobilization. This vulnerability affected not only private individuals but also governments, which faced significant practical barriers to deploying capital across jurisdictions. The theoretical long-term returns of a globally diversified equity portfolio were, for most historical actors—private or sovereign—largely unattainable due to these risks. Many historical actors, including sovereigns, chose to hold core treasuries in physical gold under direct control. Historical return data therefore primarily captures the experience of regimes and markets that avoided catastrophic loss, reflecting notable survivorship and selection effects.

The Modern Synthesis: Decoupling Custody from Return The resilient portfolio framework is made feasible by a confluence of late-20th and 21st-century financial innovations:

1. Liquid Financial Derivatives: The development of high-capacity, exchange-traded derivatives (e.g., S&P 500 index futures, introduced in 1982) provides a synthetic claim on economic performance without direct custodianship.
2. Global Electronic Execution: Digital infrastructure enables the near-instantaneous management of these positions from any location with market access.

This synthesis allows an investor to resolve the historical dilemma by holding a resilient asset base while capturing the economic return of a high-yielding, jurisdictionally risky asset class.

Implications and Dependencies This framework is a contingent solution enabled by current market architecture. Its viability depends on the continued functioning of key derivative market infrastructures and the geopolitical stability of their host jurisdictions. As financial fragmentation accelerates, this synthesis may evolve further with emerging technologies, such as blockchain-based derivatives, which could alter the landscape of resilient finance.

Appendix: Implementation

The feasibility of implementing a synthetic equity overlay varies by market, depending on the availability of liquid futures contracts and associated currency and gold hedges (see Appendix for a comparative overview of major indices).

Index	Country of Index	Long Term Expected Return (Geo Mean Real %)	Future Expected Return (Geo Mean Real %)	Long Term Vol (Std Dev %)	Sharpe Ratio	Index Future Trading Venue	CCY	CCY Future Trading Venue	Gold Future Traded in Same Block Jurisdiction
S&P 500	United States	6.6	4.0	18.5	0.38	CME (E-mini S&P 500 - ES)	USD	CME	Yes (COMEX, part of CME)
Nasdaq-100	United States	~7.5 (approx since 1985)	~3.5	25.0 (approx)	0.34	CME (E-mini Nasdaq-100 - NQ)	USD	CME	Yes (COMEX, part of CME)
EURO STOXX 50	Eurozone	4.1	5.0	19.7	0.25	Eurex	EUR	Eurex	No
DAX	Germany	3.1	5.5	31.1	0.22	Eurex	EUR	Eurex	No
CAC 40	France	3.4	5.0	22.8	0.21	Euronext	EUR	Eurex	No
FTSE 100	UK	5.3	6.5	19.5	0.31	ICE Futures Europe	GBP	ICE Futures Europe	Yes (LME)
Nikkei 225	Japan	4.2	5.0	28.9	0.26	JPX Osaka	JPY	Tokyo Financial Exchange (TFX)	Yes (JPX/TOCOM)
Hang Seng	Hong Kong	4.5 (approx since 1964)	7.5	25.0 (approx)	0.26	HKEX	HKD	HKEX	Yes (HKEX)
S&P/ASX 200	Australia	6.7	6.0	17.4	0.41	ASX	AUD	SGX	No
Ibovespa	Brazil	7.5 (approx geo, 1968-2019)	7.5	52.6	0.38	B3	BRL	B3	Yes (B3)
LQ45	Indonesia	~6.0–7.0 (approx since 1997; shorter history)	7.0	~25–30 (approx)	~0.25–0.30	Indonesia Stock Exchange (IDX) / derivatives limited	IDR	Limited (local FX futures)	No (no major local gold futures)
IPC (S&P/BMV)	Mexico	~5.5–6.5 (approx since 1978; volatile)	7.0	~30–35 (approx)	~0.20–0.25	MexDer (Mexican Derivatives Exchange)	MXN	MexDer	No
SET50	Thailand	~5.0–6.5 (approx since 1995)	7.0	~25–30 (approx)	~0.20–0.25	Thailand Futures Exchange (TFEX)	THB	TFEX / regional	No
TAIEX	Taiwan	~6.0–7.0 (approx since 1967; strong growth)	7.5	~25–30 (approx)	~0.25–0.30	Taiwan Futures Exchange (TAIFEX)	TWD	TAIFEX	No
KOSPI 200	South Korea	~5.5–6.5 (approx since 1980)	7.5	~28–35 (approx)	~0.20–0.25	Korea Exchange (KRX)	KRW	KRX	No
WIG20	Poland	~4.5–6.0 (approx since 1991; post-communist)	7.0	~25–35 (approx)	~0.20–0.25	Warsaw Stock Exchange (GPW)	PLN	GPW / Eurex access	No

Notes: Long-term data primarily from Dimson, Marsh, and Staunton (1900-2022) for most indices, representing country equity markets. Expected return is geometric mean real annualized return. Sharpe ratio approximated as (arithmetic mean real return - 1%) / volatility, assuming a real risk-free rate of 1%. For Hang Seng and Ibovespa, data from shorter periods and approximations used due to index inception dates. Jurisdiction for gold futures considers if a major gold futures exchange operates in the same country or closely aligned bloc. Future expected returns are estimates based on current valuations (e.g., CAPE ratios around January 2026) and forecasts from sources like Vanguard, GMO, Research Affiliates, and others. They use a general model of expected real return ≈ (1/CAPE) + real earnings growth (1.5-2% for developed markets, slightly higher for emerging). Actual returns may vary significantly, and past performance is no guarantee of future results. For US markets, high CAPE levels (around 40) suggest lower expected returns compared to historical averages, while lower valuations in emerging markets imply higher potential. |