Hedged Equity Strategies:

  • Hedging ladders provide downside protection for investors who want to stay in the stock market but don't want all of the risk.
  • The goal of the HELO ETF is to allow investors to hold onto their buy and hold investments while mitigating some of the downside risk.
  • Hedged equity strategies, like HELO, are becoming more popular as older individuals living longer want to remain invested in stocks but with less risk.
  • These strategies aim to reduce volatility and protect against large market downturns.

Difference Between Hedge Equity Strategies and Traditional Portfolios:

  • Hedged equity strategies offer a way for investors to participate in the stock market while limiting potential losses.
  • Traditional 60/40 portfolios may not have the same level of downside protection as hedged equity strategies.
  • Volatility can significantly impact traditional portfolios, whereas hedged equity strategies aim to mitigate this impact.

Impact of Volatility on Hedged Equity Strategies:

  • Volatility plays a crucial role in determining the effectiveness of hedged equity strategies.
  • Options used in these strategies can be affected by changes in volatility levels, which may impact performance.
  • During periods of high volatility, options prices can increase, potentially reducing returns on hedged equity strategies.

Benefits of Holding Options in an ETF Wrapper:

  • Using an ETF wrapper for options-based strategies can offer tax efficiency based on redemption processes.
  • Options on S&P 500 ETFs can potentially be more tax efficient within an ETF wrapper compared to other investment vehicles.

Understanding How HELLO Works:

  • HELLO is an actively managed strategy that uses laddered options around a low-tracking error equity portfolio benchmarked to the S&P 500.
  • The strategy hedges from down 5% to down 20% using three-month hedge windows that are staggered throughout the year.
  • The cost of options is managed through selling out-of-the-money calls, providing asymmetry around returns.
  • HELLO aims to provide two-thirds of the market's returns through a cycle with half the volatility and beta, resulting in a superior Sharpe ratio.

Different Ways to Use Hedged Equity Strategies:

  • Hedged equity strategies can be used as a way to own more stocks by reallocating cash holdings into these strategies.
  • They can also serve as de-risking tools for investors looking to reduce their exposure to equities while still participating in potential upside.
  • These strategies can complement traditional 60/40 portfolios by adding an additional layer of downside protection and potentially increasing expected returns.

The Importance of Behavioral Finance and Investor Behavior:

  • Hedged equity strategies like HELLO aim to help investors manage their behavior during volatile markets and stay invested for the long term.
  • The focus is on providing peace of mind and reducing the likelihood of panic selling during market downturns.
  • These strategies cater to both wealth accumulation and wealth preservation needs, appealing to different investor demographics.

Tax Efficiency of Hedged Equity Strategies:

  • The ETF wrapper for options-based strategies can offer potential tax advantages, especially in terms of capital gains taxes.
  • Options on S&P 500 ETFs within the ETF wrapper may have more favorable tax treatment compared to other investment vehicles.

The Role of Dividends in Hedged Equity Strategies:

  • HELLO distinguishes itself by taking dividends into account and paying them out regularly, unlike many competitors that use dividends to pay for hedges.
  • Including dividends in the strategy helps capture the full return potential of equity investments and provides additional income for investors.

Execution and Management of Options-Based Strategies:

  • Professional management by experienced derivatives traders and access to a strong trading desk is advantageous when executing options-based strategies.
  • Handling cash management, collateral management, exercises, assignments, and settlement requires expertise and support from back-office teams.

Lifecycle Considerations for Investors:

  • Hedged equity strategies are particularly relevant for retirees or individuals relying on their portfolio as a primary source of income.
  • As people live longer and need to maintain exposure to equities later in life, these strategies offer a way to manage risk while staying invested.

Expansion Potential for Hedged Equity Strategies:

  • While HELLO focuses on the S&P 500 index, there is potential for similar strategies targeting other indices like emerging markets or small-cap stocks.
  • The philosophy behind hedging with guardrails resonates with both advisors and investors seeking portfolios with downside protection.