Defined Risk Investment Process
Repeatable Four Step Investment Process
Our unique hedged-equity approach is driven by a four-step, rules-based and repeatable investment process, which removes emotions from the investment process.
The Defined Risk Strategy investment process is uniquely ‘Always Invested, Always Hedged’.
Step 1: Establish Equities
Always Invested — We begin by building a core equity position and we remain fully invested at all times.
- Consumer Discretionary (XLY)
- Consumer Staples (XLP)
- Energy (XLE)
- Financials (XLF)
- Health Care (XLV)
- Industrials (XLI)
- Materials (XLB)
- Technology (XLK)
- Utilities (XLU)
For example, our U.S. equities product is always invested in the S&P 500 via equal-weighted sector ETFs
Sector ETFs are very cost-efficient – 0.14% gross expense ratio
Always Hedged — We then minimize downside risk and seek to protect clients’ capital by purchasing at- or near-the-money put options. We use only longer-term puts, which offer the greatest cost-efficiency and stability, and then maintain that protection by rolling the hedge annually. As such, the DRS is not under duress to seek protection in market downturns.
Step 3: Seek to Generate Market-Neutral Cash Flow
We use our options-trading expertise to provide our clients with the potential for return, regardless of market conditions. Following a rules-based trading approach, we sell short-term premium to take advantage of time decay and to offset risks created by our long equity positions.
Market Neutral Strategies – Rules-Based Trades
- Potential to earn option premium income in a variety of market conditions
- Sell short-term premium to take advantage of time decay
- Predetermined adjustment and exit triggers
- Offsets risk in long positions
Step 4: Monitor and Adjust
Proprietary software enables us to:
- Obtain best-execution on all trades
- Block trade all accounts for equal, efficient and simultaneous trading
- Allocate trades evenly to all separately managed accounts
- Oversee, re-hedge and rebalance each separately managed account
- Monitor on a daily basis:
- Put option exposure, to maintain hedge relative to equity
- Cash flows from new investment and equity dividends, to remain fully invested
- Option positions for optimizing adjustments
For each account, we
- Rebalance equities as rules dictate
- Re-hedge put options annually, or intra-year, during large market declines as rules dictate
Rolling the Hedge
Our unique, repeatable Defined Risk investment process how helped investors grow and protect wealth since 1997.