ZEGA's Buy & Hedge Retirement Update

By Jay Pestrichelli

We thought it was about time to give everyone an update on the Buy &Hedge Retirement strategy considering many folks have it as a large part of their investment allocation.

In review, the way we describe this strategy is that it captures 65% to 75% of the upside of the stock market but limits the downside exposure to 8-10% for any 12-month period. As such, we took a look back to a year ago to see how that protection of the hedged strategy is performing versus the markets. The results are inline with our expectations and even slightly better.

We examined the accounts that have been in the strategy for more than a year. It’s important to note that this does not include all accounts that have been in the strategy, nor is it inclusive of all accounts. Also, at the end of each month, we post returns for the entire group of accounts to be more inclusive. However, we thought an update today was more important than waiting for a few more weeks.

Of the group of accounts examined, it turns out that from 3/12/19 through today (one year), the strategy was down in value, net of fees, between -2% and -3%. This is compared to an S&P 500 index that is down about -11.7% over the same time period. Fair to say, the hedging is working.

We also looked at how much more stock exposure, meaning how much worse can the losses be due to the market in the future. On average, there is about 5-7% more of exposure that extends out to various months between June 2020 and March 2021. There are different expirations and dates in this group, but the point is, there are months before new positions need to be entered. This means that if the market continues the drop, these accounts will participate less and less in the loss and avoid a minimal percentage of the stock market decline.