Risk or volatility: Which shark is closer to the boat?
Both risk and volatility affect investment performance, but they aren’t the same thing. The volatility of an investment can change dramatically and unexpectedly, without impacting risk. Take Treasury bonds, for example—prices fluctuate constantly, but investors are usually confident that they won’t lose money.
Risk and volatility are always present—like hungry sharks circling the boat. Even in still waters and the calmest bull markets. They are also difficult to predict and potentially devastating to hard-earned savings. Investors need a better way of managing both risk and volatility—to protect portfolios, without sacrificing the opportunity for future gains.
Option overlay strategies can protect specific areas of the portfolio that are most vulnerable to loss, without requiring that investors liquidate stocks and absorb undesirable tax impact in the process.
It’s impossible to eliminate all risk and volatility. Even holding cash comes with risk and the opportunity cost of missing out on investment returns. But any risk taken should be with the goal of adding returns. Risk that is not rewarded should be hedged. Option overlays can hedge unintended and unrewarded risk, from normal daily volatility to unexpected but severe market shocks.
StratiFi uses options to create customized overlay strategies that target specific needs for investors. Advisors can easily add these overlay strategies to portfolios, with many advantages for investors:
Tax efficient—doesn’t require selling current holdings
Liquid, transparent, and customizable
Complements existing asset allocation without changing underlying investment allocations
Maintains opportunity for future gains
Options are important tools for managing risk, but they can be costly and complex. StratiFi’s option overlay strategies were developed specifically to overcome the cost and complexity of options and to maximize the benefits. These strategies help protect portfolios from risk and volatility, supporting investors’ financial goals—from retiring on time and in comfort to funding a personal passion.
Less risk and volatility can mean higher returns
StratiFi’s option overlay strategies are designed to substantially improve portfolio performance over time. This example is a typical portfolio of 60% stocks and 40% bonds, compared with the same portfolio plus an option overlay strategy that aims to protect the entire equity component. The overlay strategy could have improved this portfolio’s cumulative return by 30% over the last 16 years.
To learn more about the truth behind asset correlations and volatility, click here for our complimentary eBook "The Five Myths that Put Portfolios at Risk: Revealing the truth and improving investment outcomes using options."
StratiFi provides investment advisory services to sophisticated investors. Past performance is not indicative of future results. Investing in securities involves significant risks, including the risk of loss of the entire investment. Certain options strategies used by some of our strategies may include the use of leverage and may create increased risk for loss of principal or limited capital appreciation. Our portfolio risk management process includes an effort to monitor and manage risk, but should not be confused with and does not imply low risk. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate strategies depend upon the client’s specific circumstances and investment objectives.
Model Portfolio Performance. The returns presented for the Model Portfolios referenced in this presentation are model results that are calculated using model data according to an allocation of assets that StratiFi currently recommends as representative of the identified investment approach (e.g. conservative, balanced, income & growth. growth, or global opportunities) and do not represent actual results from trading or actual allocations of client portfolios. The returns for many of the underlying assets are also modeled. Specifically, results for the active risk management (option overlay) assets are modeled using the techniques and assumptions described below in the section “Active Risk Management Strategies - Actual Versus Model Returns.” Other underlying assets may be modeled if actual results for that underlying asset are not available for a specific time period (see “Other Modeling”). Performance results for the strategies referred to herein and their respective benchmarks reflect total return figures and include the reinvestment of dividends, interest, and other earnings. Model and actual results reflect the deduction of subadvisory fees, brokerage or other commissions, and any other expenses that the client would have paid or actually paid, including StratiFi ’ advisory fees (calculated at the highest rate charged). StratiFi does not compare the actual returns of any client portfolio to the returns of any Model Portfolio. The Model Portfolio returns may not be representative of and may be materially different from the actual returns of StratiFi clients.
Other Modeling. An exchange traded fund (“ETF”), hedge fund, and/or active risk management (option overlay) portfolio may not have sufficient data for the time periods for which performance results are presented. For example, the ETF and/or fund have an inception date that is more recent than the start date of the period for which the performance results were calculated or the back-tested model results for an active risk management (option overlay) asset may not extend back to the start date of the period. In these instances, the returns presented are from indices (or a blend of indices) that StratiFi believes approximate the returns of the asset. The underlying indices (or proxy securities) are used for the periods where either actual returns or the active risk management (option overlay) model returns are not available and where an appropriate index (or proxy security) is available. StratiFi provide upon request a list of the assets modeled using this technique, the specific proxy securities used, and the time period covered.
Limitations of Model Performance. The model performance results are for illustrative purposes only and are not necessarily indicative of performance that would have been actually achieved if an investment utilized the strategy during the relevant periods, nor are these simulations necessarily indicative of future performance of the strategy. Inherent limitations of model performance may include: 1) the model calculations make certain assumptions (e.g. concerning margin and other expenses) and changes in assumptions that were made to calculate the returns may have a material impact on the returns presented; 2) model results are generally prepared with the benefit of hindsight; 3) model results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money; 4) there are numerous factors related to the markets in general, many of which cannot be fully accounted for in the preparation of hypothetical performance results and all of which may adversely affect actual investment results. Hypothetical performance is not indicative of future results. Model Performance Proposal Generation: Data on this page is specific to the investment strategy that you and your advisor have selected and is backtested using the target allocations of that portfolio. Your actual portfolio and results may differ from the allocations of this model portfolio. Estimated returns are based on historical yields for underlying securities and are presented for informational purposes only. Past performance is not a guarantee of future results and all investments bear the risk of loss.”
Suitability. StratiFi does not provide financial planning, tax, or legal advice. StratiFi ’ investment programs may not be suitable for all investors. Prospective investors and clients should consult with their own legal, investment, tax, accounting and other advisors to determine the potential benefits, burdens and other consequences of engaging StratiFi . Potential clients must meet certain suitability qualifications.
Data Sources. We derive our information from a variety of sources we consider reliable, including historical exchange data, published research, technical digests, news media, and from research provided by our principals and employees, which is proprietary, but we do not guarantee that the information is accurate or complete.
Comparisons to Indices. References to market or composite indices, benchmarks, or other measures of relative market performance over a specified period of time are provided for your information only. Reference or comparison to an index does not imply that any portfolio will be constructed in the same way as the index or achieve returns, volatility, or other results similar to the index.
Reproduction Prohibited. Any reproduction or distribution of this document or the Investment Management Agreement documents, as a whole or in part, or the disclosure of their contents, without the prior written consent of StratiFi , is prohibited.
SEC Registration. Registration with the Securities and Exchange Commission as an investment adviser does not imply a certain level of knowledge, skill, or training.