ALWAYS INVESTED in equity markets for growth via low-cost ETFs (buy & hold)
ALWAYS HEDGED by actively managing long-term put options (LEAPs)
Actively managing shorter-term options portfolio, utilizing a disciplined, time-tested approach
When the market drops and the equity loses value, the put option increases in value, and vice versa.
This counter-balancing investment approach is engineered to NOT lose big.
A HEDGE IS NOT INSURANCE AGAINST LOSSES
The effectiveness of the hedge and degree of downside risk mitigation varies with market conditions. The Defined Risk Strategy can and does have periods of losses.
Our goals-based hedged-equity approach is driven by a three-step, rules-based and repeatable investment process that removes emotions from the investment process.
The Defined Risk Strategy is Always Invested, Always Hedged.
A distinct, time-tested blend of passive investing and active risk management.
Always Invested – Passive, Index Investing
Equity markets tend to go up over time and outperform other asset classes over the long term.
Always Hedged – Active Risk Management
We seek to limit losses on a calendar year basis, and especially during bear markets, by purchasing longer-term put options (LEAPs), at- or near-the-money, on the entire underlying ETF portfolio. Longer-term puts offer enhanced cost efficiency and stability.
We roll, or reset, the hedge annually so the DRS is not under duress to seek protection in bear markets.
Also, after large up or down moves in the underlying index, we look to rehedge. After large upward moves, we seek to lock in gains and bring the hedge level up closer to the market level. During significant market declines (around a 20% decline from the prior hedge position), we seek to rehedge. We sell what has become a deep-in-the-money put option hedge and buy a new LEAP at- or near-the-money. The sale of the initial hedge in such instances generates capital we may then use to acquire additional equity at a market low.
We actively manage a shorter-term options portfolio using a disciplined, rules-based approach to help offset the cost of hedge and provide additional portfolio return.
Actively Managed, Rules-Based Trades
Propriety software enables us to:
Monitor on a daily basis:
Portfolio Rebalance (Re-Hedge) Process:
Rolling the Hedge
The DRS was launched in 1997 to provide investors with a better way to invest over full-market cycles—generate consistent returns and avoid major losses in bear markets.
So how’d we do?
The Defined Risk Strategy is available across multiple asset classes and investment structures to serve a wide range of investor objectives and risk tolerance levels.
Randy Swan discusses how the Defined Risk Strategy is designed to address the investment challenges of today and tomorrow.