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)
    • Real Estate (XLRE)
  • Health Care (XLV)
  • Indus­tri­als (XLI)
  • Mate­ri­als (XLB)
  • Tech­nol­o­gy (XLK)
  • Util­i­ties (XLU)
Step 1 of the Defined Risk Strategy Investment Process- Establish Equities | Swan Global Investments

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

Step 2: Create the Hedge

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

Rolling the Hedge - The Swan Defined Risk Strategy Investment Process | Swan Global Investments

Our unique, repeat­able Defined Risk invest­ment process how helped investors grow and pro­tect wealth since 1997.

See More DRS Per­for­mance