PutWrite strategies can improve the risk-return efficiency, liquidity, flexibility and cost-effectiveness of investor portfolios.

Evolutionary, Not Revolutionary

When we contemplate the evolution of the investment management industry in aggregate, it appears to us that an increased desire to control risk and isolate and/or define investment outcomes is a persistent, likely permanent, feature of the financial market landscape. Waning investor preference for stock pickers is being partially reborn in hopes of identifying and capturing market factors and risk premiums. In response, investment strategy innovation is becoming less about honing active stock selection and more about engineering and delivering a unique, identifiable return distribution. That said, innovation does not necessarily require increased complexity. Invariably, risks must be managed, and if risks are not managed by a “stock picker”, then precautions must be taken at the portfolio level. We view the increasing adoption of risk-based allocations and the success of products such as risk-premia, smart-beta, low-volatility, factor-based and multi-asset class strategies as first-hand confirmation of this tectonic shift.

The perennial investor challenge is to source investment strategies that can offer both total returns consistent with long-term portfolio targets and manageable levels of risk (volatility and drawdown). Naturally, investors seek to maximize their return earned per unit of risk assumed, i.e. risk-adjusted returns. However, such risk-efficiency can’t be “spent” to meet future obligations without the application of meaningful leverage, usually a less desirable risk element.

In this vein, we present collateralized equity index put writing as a strategy well suited to improve the risk-return efficiency, liquidity, flexibility and cost-effectiveness of investor portfolios, be they passive or active. The chart below illustrates the potential enhanced risk-efficiency index option writing strategies offer versus a variety of traditional asset class indexes. What follows is an anthology of sorts on collateralized index put writing that is guided by our investment philosophy, years of research and implementation, and investor conversations.

POTENTIAL TO ENHANCE PORTFOLIO RISK EFFICIENCY

Index Annual Return vs. Risk (Mar 2006 – Sep 2019)

Source: Bloomberg LP, CBOE. The CBOE Index performance set forth above represents a combination of live and backtested performance. Please see additional disclosures at the end of this piece for specific details. Indexes are unmanaged and are not available for direct investment.