Buy & Hedge Retirement Peer Review Update

By Derek Moore

As the 3^rd 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 2^nd 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.

Note: Performance includes reinvestment of dividends and other earnings.All data for this supplemental report is sourced from Morningstar as reported by each advisor. Hedged equity Strategies selected from Morningstar's hedged and options categories based on description and tactics.

ZEGA Financial is a SEC registered investment adviser and investment manager that specializes in derivatives. ZEGA is a separate accounts manager and all returns expressed herein are solely from the separate accounts business within ZEGA.  ZEGA Financial claims compliance with the Global Investment Performance Standards (GIPS®). To receive a full list of composite descriptions of ZEGA Financial and/or a presentation, contact Jay Pestrichelli at 1-800-380-9342, ext 101 orjay.pestrichelli@zegafinancial.com.

All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is no guarantee of future results and there can be no assurance, and clients should not assume, that future performance of any of the model portfolios will be comparable to past performance.Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio.

These results should not be viewed as indicative of the advisor’s skill. The prior performance figures indicated herein represent portfolio performance for only a short time period, and may not be indicative of the returns or volatility each portfolio will generate over a long time period. The performance presented should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the performance information. The actual results for the comparable periods would also have varied from the presented results based upon the timing of contributions and withdrawals from individual client accounts. Employee accounts do not pay advisory fees, so the returns illustrated for the strategy are higher than they would be if employee accounts paid similar fees.

The Buy & Hedge Retirement strategy is designed to provide broad market exposure while limiting the downside risk in the event of a material market correction. The product utilizes index-based options and ETFs. To qualify as fully discretionary, at least 70% of the account must be dedicated to the composite strategy and no more than 20% of the account may be invested at discretion of a party other than ZEGA Financial. The position is created using a combination of options to build synthetic exposure as well as creating an income portion designed to generate a low risk 3-4% of annual return. The income portion may be constructed using fixed income or protected equity with a defined risk. The benchmark is the S&P 500. This benchmark does not use derivatives. The S&P 500 Index is a collection of 500 of the largest publicly traded US Equity large cap companies. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. There are no assurances that a portfolio will match or outperform any particular benchmark.