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Buy & Hedge Retirement Update: Some Fall Cleaning to Reduce Risk

By Derek Moore

Within the Buy & Hedge Retirement Strategy, today our traders adjusted some tactical positions and thus reverted to the standard issue construction. You might remember that our analysis revealed that when markets selloff by a certain percent, it became advantageous to make adjustments that would capitalize on any rebound.

The more technical explanation is that we added more delta or market exposure. Simply put, this resulted in capturing a greater percentage of a move back higher than would have occurred has we simply stayed in the prior positions. This adjustment is one of the reasons why our hedged equity strategy has captured a greater percentage of the rebound than normal. In fact, the strategy demonstrated a higher correlation to the underlying markets than it normally would have.

Capturing the rebound as markets came within striking distance of all-time highs, the strategy was presented an opportunity to pair back some of that exposure after getting what we wanted in the short term.  This takes off risk in the portfolio and settles back into the normal portfolio design.

The other action you will notice is a reduction in some exposure to short duration high yield fixed income. While there remains some embedded hedges to offset risk, the addition of some senior loan exposure comes with additional risk-managed fixed income. Remember, fixed income is meant as a funding source for the hedged equity.

Senior loan ETFs have similar risk profiles to short duration high yield yet enjoy less interest rate sensitivity. Plus, they sit higher up in the pecking order of the capital structure of corporations. Our team saw an opportunity given where the space was trading relative to high yield to help augment the investment mix.

Some of you might be wondering if this was a market call from the ZEGA investment committee. It was not. This is simply an implementation of a systematic strategy where research and analysis has led to further portfolio optimizations. The whole idea of Buy and Hedge Retirement is to limit material downsides in equity markets while capturing a majority of the upside moves. We’ve found that after selloffs, rebound moves required additional delta participation to keep the relationship targets intact for you and your clients.