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White paper — Where does Hedged Equity Fit in a Portfolio

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So where does the hedged equi­ty fit in a port­fo­lio?”  We field this ques­tion often.  Sim­ple, yet effec­tive invest­ment approach behind the the Defined Risk Strat­e­gy (DRS) appeals to many as it can serve dif­fer­ent roles with­in a port­fo­lio.

Over the course of many white papers, blog posts, and pre­sen­ta­tions, Swan Glob­al Invest­ments has made the case for the DRS, and hedged equi­ty in gen­er­al.

Engi­neered to max­i­mize up-mar­ket gains and min­i­mize down­side loss­es, the DRS is attract­ing atten­tion from those seek­ing inno­v­a­tive solu­tions. Once one under­stands and accepts the DRS, the next log­i­cal ques­tions to answer are:

  1. How much DRS should I add to an exist­ing port­fo­lio?
  2. Show me where the DRS fits in a port­fo­lio — what role does the DRS play?

Answer­ing these two ques­tions will be the focus of this paper.

First this paper dives into the allo­ca­tion ques­tion, exam­ines the impacts of adding the hedged equi­ty strat­e­gy, like the DRS, in incre­men­tal­ly larg­er pro­por­tions to an exist­ing bal­anced port­fo­lio and ana­lyzes the impact on port­fo­lio risk and return met­rics.

This analy­sis is fol­lowed by a review of the var­i­ous ways the DRS can fit in a port­fo­lio to accom­plish var­i­ous goals, name­ly:

  • The DRS as a total port­fo­lio solu­tion
  • The DRS as a core equi­ty posi­tion
  • The DRS as an alter­na­tive invest­ment
  • The DRS as a dis­tri­b­u­tion vehicle/fixed income sur­ro­gate

Sim­i­lar­ly, we exam­ine the impacts on the risk/return met­rics after fit­ting the DRS into a port­fo­lio to ful­fill those var­i­ous roles.

The results are intrigu­ing.

The ques­tions of where the DRS fits in a port­fo­lio and rec­om­mend­ed allo­ca­tion to the DRS are indica­tive of an increas­ing real­iza­tion that con­ven­tion­al port­fo­lio con­struc­tion may not be enough in a world of uncon­ven­tion­al and unprece­dent­ed chal­lenges. With mar­kets near all-time highs and yields at all-time lows, a major sell-off on either side of the stock-bond equa­tion could be cat­a­stroph­ic.

We believe that incor­po­rat­ing a strat­e­gy that direct­ly address­es mar­ket risk, like the Defined Risk Strat­e­gy,  into a port­fo­lio is a ratio­nal, proven way to decrease the down­side risk in a port­fo­lio. Whether the DRS ‘fits’ as a core equi­ty, across mul­ti­ple asset class­es, as an alter­na­tive, or as a fixed income sur­ro­gate, every lit­tle bit helps.

By | 2017-08-08T12:04:29+00:00 February 20th, 2017|DOCUMENTS, Research|Comments Off on Where Does Hedged Equity Fit?