By Derek Moore
With the close of the 2nd quarter of 2019 its time again to review how our Buy and Hedge Master Composite is compared to other managers in the hedged equity space. This includes not only separately managed accounts (SMAs) but also various mutual funds.
For the first six months ZEGA captured about 68% of the upside of the S&P 500 Index. This is slightly below 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 to participate in the equity move of the market with a good deal in short duration fixed income to help fund those long market positions. This year the peers in our comparison data have had mixed results.
Of the various peer strategies tracked, ZEGA now has moved ahead in all comparisons including the YTD, 3 year, and 5 year. Risk adjusted returns matter and are calculated often using a Sharpe ratio which looks at the return minus the risk-free rate over the standard deviation. It’s worth noting that our 3-year annualized return in the only one in double digits representing a capture relative to the S&P 500 Index of 72% of the upside.
When evaluating a hedged equity strategy there are some primary things to consider. First, how much of the upside does the strategy yield? Then, when the market sells off materially, how much of the downside is avoided? We feel like putting a floor in a portfolio has a number of positives. First, those in the prime working years inching towards retirement can sleep a little easier knowing that if a 2008 scenario happens, they have a floor.
Also, as ZEGA’s own Jay Pestrichelli has noted on various financial news shows, if an investor does not participate in all the downside, they can buy more shares at cheaper levels and enjoy the potential rebound. Jay refers to this as the Hedger’s Opportunity.
A few additional points. Our Sharpe Ratio has moved to the top of the pack on a 3- and 5-year basis. Remember, think of Sharpe as measuring how much volatility you had to endure to get a return. As markets have marched toward all-time highs, we’ve seen some additional dispersion in returns across hedged equity strategies.
We are believers in being long the S&P 500 Index but being hedged. Hedging takes some of the fear out of putting new money to work or remaining in the market. This is especially true for those near retirement or newly retired. Want to hear more? Schedule some time to talk with the ZEGA team about how you can incorporate hedged equity for your clients.
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