Bank Sarasin, the Swiss wealth manager, is well known for its thematic and sustainable funds, which are designed to help investors take advantage of global trends or environmentally appealing opportunities. Now it is promoting a new speciality – nuanced investing.

A nuance is “a small change that leads to an enhancement,” says Michael Kaimakliotis, who is Sarasin’s co-head of nuanced investing. He and José Spescha have been working on nuanced investment products since June 2007, and the bank last week closed subscriptions on its first such funds.

Nuanced investing, Mr Kaimakliotis says, draws on insights from behavioural finance to assess clients’ attitudes to risk and uses derivatives to help them achieve their returns.

“For a given level of risk, we can get a higher return than with traditional portfolio management techniques,” he says. “In particular, the framework allows us to provide greater downside protection without reducing expected returns.”

Modern portfolio theory tells investors that choosing the right combination of stocks is as important as choosing individual shares.

They should hold well-diversified portfolios to maximise returns for a given level of risk, and borrow money to invest in that portfolio if they want to increase their profits.

Risk is defined statistically by how much on average an investment will deviate from its average return – the mean-variance framework – and the unit of measurement is the standard deviation.

But that is not the way ordinary people define risk when they are investing, says Mr Kaimakliotis. “I firmly believe that most clients don’t understand standard deviations.”

He says he became dissatisfied with the traditional approach to constructing investment portfolios when working for the private banking arm of UBS.

“We started getting questions [from clients] as the complexity of the portfolio increased. They didn’t understand their portfolio any more.”

Mr Kaimakliotis turned to behavioural finance. The field was developed by two US psychologists, the late Amos Tversky and his colleague, Daniel Kahneman, who won the Nobel prize for economics in 2002.

Much as the eye can be fooled by optical illusions, people often make irrational decisions about investment because of the way they feel emotionally about losses. Researchers have identified many quirks in the way humans perceive investment that are incompatible with the rational principles of the finance industry.

“The work in this field revolves around the idea that the mean variance framework is inadequate to capture investors objectives,” Mr Kaimakliotis says.

“For instance, an investor gives me $100 to invest. If the value of the portfolio rises to $101 then he is most likely marginally happier. If the portfolio falls to $99, however, he may be upset that we have lost his hard-earned money.”

Consider the example of someone who is investing with a particular goal in mind, such as paying university fees for a child. “If the value of the portfolio falls below a certain limit he may face catastrophic risks. This is inconsistent with a mean-variance approach to managing money but clearly makes sense.”

This perspective, Mr Kaimakliotis says, is useful for looking at how investors think about goals. Avoiding catastrophe sets a lower limit on target returns. Many investors have a level of return that they would like to achieve, but may not need.

“In this case outcomes above these levels are like lottery wins – nice to have but not the core objective for your investment portfolio.” Between catastrophe and lottery lies range risk.

“We see a stock as a collection of exposures. A long stock can be engineered as a short put, plus a bull call spread, plus a long call.”

The short put would be the catastrophic risk, the call spread would be range risk, and the long call would be a lottery-like exposure.

“Since when we buy the stock we are equivalently purchasing each of these option strategies the question becomes: do we want to own all three exposures? By seeing risky assets for their underlying exposures we can take a more nuanced approach to investing and take exposure to only the risks we like.”

For example, he says, if an investor thinks a stock will rise from $100 to $120 but no further, then he makes extra gains by selling the exposure to the lottery-like returns above $120.

Regardless of the theoretical strengths or weaknesses of nuanced investing, it is a memorable term. “I came up with the name,” Mr Kaimakliotis says.

Those tempted to borrow it for their own investment products should take note that Mr Kaimakliotis has trademarked it, and licences it to his employer, Sarasin.