structurALPHA® U.S. Large Cap (Buy-Write)

Inception: June 30th, 2010

Strategy Description

The structurALPHA® US Large Cap strategy is a long exposure in the S&P 500 hedged with a short, one-month, at-the-money call option on the underlying exposure. The short call option is rolled each month at expiration to the next month, at-the-money striking price. The long index exposure and short option hedge are maintained at all times regardless of market action or volatility environment, with no tactical adjustments. Known as a buy-write or covered call, it is the most basic hedged strategy.


Objective

The structurALPHA® US Large Cap strategy is a rules-based hedged equity strategy designed to deliver equity returns over the market cycle, with significantly reduced risk. It seeks investment results that correspond generally to the return and risk characteristics of the CBOE S&P 500 Buy-Write Index (BXM).


Suitability

The structurALPHA® US Large Cap strategy is appropriate for investors who seek or are required to maintain US large cap exquity exposure, but want to reduce the risk profile of that exposure. It is also suitable for investors who desire to capture the equity risk premium through the methodical sale of the option hedge. It is a perfect alternative for investors who seek to include hedged or risk-modified exposures in their asset mix, and prefer them in a low-cost, transparent and liquid vehicle.


Rationale

Combining a long broad market exposure with a short one-month, at-the-money call option hedge on that exposure creates a compelling return and risk profile. Collecting a cash flow from the methodical monthly sale of the option hedge is an added source of portfolio return. Option prices are highly sensitive to market volatility. When markets are anxious and volatility is high(er), the cash flow collected each month from rolling the short option hedge is greater. This inverse correlation (market action and volatility) brings an additional source of portfolio diversification. And since option prices decay with the passing of time, the short option hedge is always decaying in the strategy's favor.

The resulting returnset delivers atttractive return and risk metrics relative to its long-only counterpart: low beta, superior alpha (risk-adjusted return), smaller drawdown in adverse markets, faster recoveries to high-water marks, positive upside/downside market capture asymmetry, outperformance relative to an unhedged exposure in sideways, mild up-markets and down markets. The known tradeoff that investors who desire these compelling portfolio characteristics accept is that the buy-write strategy will have limited participation in strong up-markets.

The structurALPHA® US Large Cap strategy is compelling as a stand-alone limited-risk equity strategy or as an efficiency expanding exposure within a global allocation.

From the Portfolio Manager:

Preempting the SPY ex-Div

Rolled the short September 243 call options a day early to preempt getting called away as the SYP goes ex-dividend tomorrow (9/15). We closed the short September calls and re-established a short position at the October 250 strike. Volatility and option premium are at historic low levels...still, we follow the strategy protocols and sell the option hedge regardless of volatility levels. For reference, the first striking price our Large Cap Buy-Write strategy sold in July of 2010 was 109.

Thomas F. McKeon, CFA | 2017-09-14

Raising Cash for SEP Expiration

Raised a little cash in selected accounts today to make sure there is enough cash to roll the hedges this coming Friday at the September option expiration. The market has rallied strongly since the August expiration and all of our underlying hedged exposures are well in-the-money. As such, we will be spending money to close the short option positions and collecting a little bit less as we re-establish a hedge on the October expiration. Also, the StateStreet S&P 500 ETF (SPY) goes ex-dividend this expiration Friday and our protocol is to roll the hedge a day early in order not to get called away, when our short option hedges are in-the-money. That way, our portfolios get to collect the healthy SPY quarterly dividend. An added bonus is that covering the hedges at a loss creates short-term losses....this can be useful at tax time.

Thomas F. McKeon, CFA | 2017-09-12

Welcome to PM Insights

Here we will be sharing our thoughts and insights on recent market action and any portfolio activity we have taken across our suite of strategies or particular to this strategy. Topics will include: valuations, allocation tilts, volatility, premium captured at the monthly hedge roll and anything else the portfolio manager feels is relevant.

Thomas F. McKeon, CFA | 2017-09-05


Investment Performance

Performance through: August 31, 2017

Trailing Returns: Period structurALPHA
US Large Cap
CBOE BXM S&P 500 Global
Hedge Fund
Year to Date 7.52 8.93 11.93 3.81
One Month 0.43 0.27 0.31 0.29
Three Month 2.44 1.96 3.01 1.44
Six Month 4.78 5.11 5.65 2.15
One Year 10.62 11.90 16.23 5.59
Two Year 21.13 21.04 30.83 3.57
Two Year (Ann.) 10.06 10.02 14.38 1.77
Three Year 21.31 19.80 31.45 -0.02
Three Year (Ann.) 6.65 6.21 9.54 -0.01
Four Year 39.89 39.99 64.64 5.32
Four Year (Ann.) 8.75 8.77 13.27 1.30
Five Year 44.15 44.38 95.43 10.09
Five Year (Ann.) 7.59 7.62 14.34 1.94
Six Year 72.81 72.97 130.61 8.73
Six Year (Ann.) 9.55 9.56 14.94 1.40
Seven Year 87.85 79.13 173.27 7.76
Seven Year (Ann.) 9.42 8.68 15.44 1.07
Inception 92.41 90.60 179.22 9.27
Inception (Ann.) 9.56 9.42 15.41 1.24

Inception: June 30th, 2010

 

Annual Returns structurALPHA
US Large Cap
CBOE BXM S&P 500 Global
Hedge Fund
2016 8.56 7.07 11.96 2.50
2015 5.38 5.24 1.38 -3.64
2014 7.10 5.64 13.69 -0.58
2013 10.90 13.26 32.39 6.72
2012 5.26 5.20 16.00 3.51
2011 11.14 5.72 2.11 -8.87
         

All performance figures are percents. Performance composites and calculations are Global Investment Performance Standards (GIPS) compliant results from actual client accounts. Performance figures are net of CSCM maximum annual fee and all transaction costs. Past performance does not guarantee future returns. All investments involve risk. The use of options in a portfolio may not be suitable for all investors.