White paper

Jan. 31, 2021

Optimizing Asset Allocation

Seeking Portfolio Optimization with Hedged Equity

White paper — Overview

By definition, systematic risk cannot be diversified away. Therefore, at Swan, we believe if you can’t diversify away systematic risk, you must hedge it away.

Swan’s Defined Risk Strategy (DRS) was specifically built to compensate for limitation in asset allocation and some of the inherent weaknesses in stock selection, market timing, and asset allocation (including buy-and-hold investing).

The goal of this study is to show how hedged equity, through an investment vehicle such as the DRS, can be superior to traditional asset allocation or help enhance it. The results are intriguing.

This white paper also highlights 13 popular, well-known asset allocation strategies and illustrates how an allocation to the DRS could offer favorable absolute and risk-adjusted returns.

Executive Summary:

  • The DRS was created to achieve the same goals of increased returns and reduced risks sought by a diversified MPT portfolio. However, Swan DRS seeks to achieve these goals in a much simpler manner; one with more quantifiable risks and with less moving parts.

  • The DRS seeks to directly and explicitly manage market risk. Traditional asset allocation takes an indirect and not-always effective approach in attempting to mitigate

  • The DRS seeks to provide favorable absolute and risk adjusted returns compared to almost any asset class or diversified portfolio over an entire investment cycle.

  • Portfolio allocations to the Swan DRS may be beneficial to investors and advisors diversified portfolio over an entire investment cycle. Similarly, we examine the impacts on the risk/return metrics after fitting the DRS into a portfolio to fulfill those various roles.

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