By Derek Moore
As the 3rd quarter is in the books it is once again time to look at our Hedged Equity Comparison peer review. (Click here for a PDF version) The table above illustrates the performance for ZEGA’s Buy and Hedge Retirement Strategy against similar strategies in the space.
For the year to date, 3-year, and 5-year periods ZEGA outperformed similar strategies while also finishing only 2nd in a risk adjusted Sharpe Ratio comparison. We only trailed in the 1-year look back period.
The Buy and Hedge Retirement Strategy aims to capture a good portion of the upside while having material downside protection where a floor is set. Year to date we’ve captured 60% of the upside. Given that markets have been relatively flat or sideways over the past couple of years the upside capture has been consistent with what we would have expected in that environment.
How flat has the market been? Consider the following table showing various recent highs along with the close yesterday beginning in January of 2018.
Source: Author Calculations / Think or Swim Platform
The market in January of 2018 was only 4.2% less than it was yesterday around the close of trading. We are currently only 1% below the most recent all-time high when the market level was 3027 on 7/22/2019.
The reason why flat markets are challenging for Buy and Hedge strategies is that although managed, there is a cost of hedging. Many Buy and Hedge clients would rather the market go way up (thus capturing the upside), or way down (thus avoiding most of the downside). Remember avoided losses present a hedgers opportunity to buy more shares at depressed prices.
A last point on the reason to be hedged. Markets are generally up 4 out of 5 years historically. When we have a bull run like the past decade it can be easy for investors to feel like maybe protection isn’t needed. Often investors sell at the bottom and buy and the top trying to time the market.
Hedging is an all the time strategy that is designed to give clients piece of mind. Especially for those that are nearing or in retirement. As we’ve said in the past, hedging is sometimes easiest and the least expensive when markets are near all-time highs like we are now.