What’s the Difference? Client Fit ZBIG versus Buy and Hedge Strategies
With the wide release of ZEGA’s Buffered Index Growth Strategy more advisors have been reaching out with questions related to understanding the differences with our Buy and Hedge Strategy. Specifically, why they might use one versus the other in a client’s portfolio.
The links above will lead you to more detailed information about the construction and targets for each. To try and answer the question on fit, just know that it really comes down to what your clients are looking for and what part of the risk curve they are comfortable with.
Buy and Hedge strategies capture a good portion of the upside of markets but install a floor to stop or avoid losses beyond a certain point. An investor who is more risk averse might naturally gravitate towards this approach. Others nearing retirement or in retirement don’t have the ability to absorb catastrophic market losses like 2008-09. Using a hedged equity strategy makes sense for them as they still may need equity exposure to grow their assets and facilitate redemptions from their portfolio for expenses.
On the other hand, someone who has more working years ahead or less risk averse might be drawn to ZBIG. They may already have equity risk but want to enjoy a buffer should markets turn to the downside. ZBIG Leveraged allows them to target returns higher than the market. It also allows them to target a small gain even if the underlying index sells off 25-30%. Unlike a hard floor, if markets sell off bad enough they will re-join the losses.
Now while we only touched on ZBIG Leveraged, ZEGA also offers a standard version and one that can be used in IRA accounts. Each one has its own targets on the return and risk side.
In both families of strategies, you shift some risk exposure from equity to high yield fixed income. The high yield fixed income category is one of the riskiest in the fixed income space. It is not appropriate for all investors. This risk shifting has some nuances that should be understood. Call us to better understand these risks.