White paper

Feb. 20, 2017

Where Does Hedged Equity Fit?

White paper — Where does Hedged Equity Fit in a Portfolio

Advisors and institutions alike often wrestle with the question, ‘where does hedged equity fit?’- what role does it serve? And by extension, how much should the allocations for equity or fixed income be adjusted to accommodate hedged equity allocations?

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:

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.