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Hedged Equity Update: Peer Comparison and Rolling Out Expirations Early

By Derek Moore

Buy & Hedge Retirement Strategy Peer Comparison 2019

As the clock struck midnight on December 31st, so too did another full year of performance returns close the books. As a reminder the goal of a hedged equity strategy is to put a downside floor in portfolios to protect against material downturns while capturing a good portion of the upside. We’ll keep the comparison update short this time as we’ve got some other news for the hedged equity strategies to share, but to sum it up, ZEGA’s numbers had a strong showing against our peer set - click here for a PDF version.

Opportunistic Rolls

At ZEGA we are always monitoring our position delta in our Buffered and Hedged Equity Strategies. Recently as the market moves helped bolster returns, it presented an opportunistic time to roll positions early.

This early roll did two things. First, it lowered our downside risk should markets pullback thus protecting embedded gains. But secondly, the pricing and cost of hedging on the 2022 positions was quite favorable for clients as volatility on the long end had come down.

To summarize some benefits:

  • Opportunistically lowered downside risk and locked in gains for Buy & Hedge strategies
  • Raised the embedded position buffer or floor for ZBIG portfolios and locked in gains
  • Took advantage of favorable prices to enter new positions

The negative to early rolls is that portfolios end up experiencing the cost of hedging twice and hence capturing a little less of the upside if the market continued to rise. This is something our traders always weigh. In the face of the strong market year and that the new options created favorable positions, the decision was made to lock in gains and re-establish protection levels.

We know that this type of description could easily become more complicated so we try to simplify as best we can. The benefit of a separately managed account is that you can see all the underlying positions in the accounts. When changes occur, naturally you might have questions. We wanted to provide a little insight into the why behind it and what we believe are the benefits.