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ZEGA’s Hedged Equity Peer Comparison Update

By Jay Pestrichelli

With the close of the 1st quarter of 2019 its time again to review how our Buy and Hedge Master Composite compares to other managers in the space. This includes not only separately managed accounts (SMAs) but also various mutual funds all focused on hedged equity.

For the first three months ZEGA captured about 70% of the upside of the S&P 500 Index. This is within range of our target of 70% to 75% of the upside capture. As a hedged equity strategy, we look to capture most of the upside while missing much of the downside.

Most of our separately managed accounts are some combination of options that participate in the equity move of the market paired with short duration fixed income for funding.

We’re all aware of the strong stock rebound this quarter, but the fixed income markets also reflated so Buy and Hedge experienced returns from both asset classes leading to a higher than peer year to date return of +9.38%. Our position is also top on our list of peer comparisons over the 1 year and 3-year returns. For the 5-year period, only one manager edged ahead of us.

Risk adjusted returns are also part of the calculus on our peer comparison via the Sharpe Ratio. In simple terms, it measures how much volatility an investor must endure to produce a given return. The higher the ratio, the better the risk adjusted return. Over both a 3-year and 5-year period, ZEGA’s Hedged Equity Master Composite Sharpe Ratio is in the upper percentiles.

Our unique approach has inherent advantages that capture more of the market upside.  So, when the market rips as it did in Q1, the difference is evident. It also highlights that more intricacies are involved with developing a solid hedging strategy. We look to build portfolios which can withstand market downturns while reducing the cost of hedging to an allowable level that preserves our investment goals for your clients.