The primary focus of all investors should be to manage the variability of their portfolio returns through an investment process. Why? Because it is the one aspect of investing that you can influence completely. If an investor has a greater degree of conviction about the consistency of the return of their portfolio, then it follows that they will be more certain that this rate of return will be sufficient to allow them to reach their long-term investment goals.
However, most investors fail to fully understand the return variability of their portfolios and the negative implications this has for achieving their goals. Why? Because they use a traditional active approach to portfolio management, whereby they hire a portfolio manager to invest in certain securities or industry sectors based on an opinion of value or an attempt to time the market (trying to correctly anticipate whether to be invested or not invested). Using this traditional approach makes predicting a future rate of return difficult because there is no way of knowing with certainty what the return will be and how much volatility their portfolio will experience in achieving this return.
Elysium Wealth Management Inc's equity hedging strategies offer a solution for investors. Our proprietary approaches to portfolio management produces two critical benefits when compared to traditional active portfolio management:
- Predictable rates of return over a specified time horizon
- Predetermined amounts of return volatility
Elysium can implement the following equity hedging strategies in client portfolios:
Quarterly Hedging Strategies
A quarterly equity hedging strategy utilizes a S&P/TSX 60 index basket and 90 day equity call options. It is designed to capture any potential appreciation of the basket up to 4% and protect against a loss of up to 2% during a calendar quarter.
The historic quarterly returns produced by the S&P/TSX 60 index are within this 4% to -2% range 80% of the time. This is the primary hedging strategy that Index Portfolio Canada structures in our client portfolios because of the high success rate based on historical financial market performance (80%) and because it offers the most flexibility to change the parameters of the hedge prior to its maturity should the markets move outside of the 4% to -2% range.
Semi Annual or Annual Hedging Strategies
A semi annual or annual equity hedging strategy utilizes a S&P/TSX 60 index basket and at-the-money 180 day or 360 day equity call options. It is designed to produce a known return when the hedge is initiated, by limiting the potential gain of the index basket in exchange for a known amount of protection against a loss. Compared to a quarterly hedging strategy it offers less flexibility to change the parameters of the hedge prior to maturity and generally offers less potential upside appreciation. However, it provides more protection against a loss if a severe market decline occurred over a short time period.
Equity Collar Strategies
An equity collar hedging strategy utilizes an S&P/TSX 60 index basket and insures this security against a decline in price below a pre-determined price level (a floor price) and still allows an investor to receive any potential appreciation in the index basket up to a predetermined price level (a ceiling price). An equity collar can be structured to mature for a term of six months to two years.
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