Defined Risk Investment Process

How it Works

Invest in Equities

Markets tend to go up over time, so we’re ALWAYS INVESTED in low-cost ETFs

Hedge the Equities

Severe losses can derail investors’ goals, so we’re ALWAYS HEDGED

Seek Additional Return

We actively manage shorter-term options portfolio to help offset the cost of the hedge

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.

Simple and Effective.

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.

Repeatable 3 Step Investment Process

Our unique hedged-equity approach is driven by a three-step, rules-based and repeatable investment process, which removes emotions from the investment process.

 

The Defined Risk Strategy is uniquely Always invested, Always Hedged.

Step 1 - Invest in Equities

Always invested – We begin by building a core equity position and we remain fully invested at all times.

  • Consumer Discretionary (XLY)
  • Communications Services (XLC)
  • Consumer Staples (XLP)
  • Energy (XLE)
  • Financials (XLF)
  • Real Estate (XLRE)
  • Health Care (XLV)
  • Industrials (XLI)
  • Materials (XLB)
  • Technology (XLK)
  • Utilities (XLU)

For example, our U.S. equity product is
always invested in the S&P 500 via
equal-weighted sector ETFs.

 

Step 2 - Hedge the Equities

Always Hedged – We then minimize downside risk and seek to protect clients’ capital by using put options. We use only longer-term puts, which offer the greatest cost-efficiency and stability, and then maintain that protection by rolling the hedge annually. As such, the DRS is not under duress to seek protection in major market downturns.

Step 3- Seek Additional Return

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

 

  • No options strategy works all the time. 
  • Markets are always evolving.
  • Thus, RISK is always evolving.
  • As such, an active approach is necessary.
Monitor and Adjust

Propriety software enables us to: 

  • Obtain best-execution on all trades
  • Block trade all accounts for equal, efficient and simultaneous trading
  • Allocate trades evenly to all separately managed accounts
  • Oversee, re-hedge and rebalance each account
  • Monitor on a daily basis:
    • Put option exposure, to maintain hedge relative to equity
    • Cash flows new investment and equity dividends, to remain fully invested

For each account, we: 

  • Rebalance equities as rules dictate
  • Re-hedge put options annually, or intra-year during large market declines as rules dictate

Rolling the Hedge 

Since inception in 1997, our unique, repeatable Defined Risk Investment process has generated consistent, long-term returns by protecting irreplaceable capital.

A Message from Founder, Randy Swan

Randy Swan discusses how the Defined Risk Strategy is designed to address the investment challenges of today and tomorrow.

Meet Swan Global Investments

Learn more about the Swan team and the unique design of the Defined Risk Strategy.

LEARN MORE