The 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.

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