Defined Risk Overlay
Stabilize Returns, Minimize Risk and Taxes
The Swan Defined Risk Overlay applies our hedge and option income components for managers who have portfolios with low cost basis and concentrated stock positions. Overlaying these types of portfolios with protection and income features can help clients smooth out returns and protect against extreme drawdowns, without incurring the taxes that would be triggered by liquidating securities.
The Swan Defined Risk Overlay program is ideal for executive stock programs that are restricted from liquidation or from full investment in Swan’s SMA program.
The Swan Defined Risk Overlay has a few differences from our traditional Defined Risk Strategy process, including:
- Investors may use their own underlying equity portfolios
- Customized hedging and income strategies are available
“Prophesy as much as you like, but always hedge.”
- Oliver Wendell Holmes
A Solution to Define and Manage Portfolio Risk
Market risk, or systematic risk, is by definition “undiversifiable”. Market risk, as occurred in 2000–2002 and 2008–2009, cannot be solved by Modern Portfolio Theory (MPT) alone. Market risk can only be solved by exiting the market or by hedging.
Swan strongly believes that no one can accurately predict or time the market in the long run which removes or severely diminishes exiting the market
as a viable option. This leaves hedging as one of the few alternatives.
Options, when used correctly, are typically the most effective solution to address market and especially tail risk. Similar to how options are regularly used by airlines to hedge fuel costs, farmers to hedge weather conditions, and large institutions, banks, insurance companies, and money managers, the Defined Risk Overlay seeks to define or minimize portfolio exposure to market risk.
The Swan Defined Risk Overlay, employing a proprietary model to balance protection, cash flow and total return, can be applied to manage risk for a range of portfolios including concentrated stock positions, single asset class and multi-asset class portfolios.
With the risks in marketplace mounting, there is increased interest risk-managed strategies among investors and the professional advisor and money manager communities.
Feel free to contact our team regarding various customization and implementations of the Swan Defined Risk Overlay solutions.