March 20, 2019

In Volatility, Should You Be Protectionist or Opportunistic?

The following text is a transcript of a portion of a speaker’s presentation made at an industry conference or during an interview. This transcript solely represents the view of the individual who spoke, and not the view of Financial Advisor IQ or any other group.
Source: FAIQ, Mar. 1, 2019 

GARRETT KEYES, REPORTER, FA-IQ: Volatility in the markets is causing advisors to question whether they should position clients’ portfolios to take advantage of market swings or protect against them. And some FAs wonder how they should implement these changes. Speaking with FA-IQ, two experts give differing takes.

What do you think the best way is for an advisor to hedge their clients’ portfolios?

GREG HAHN, PRESIDENT, CIO, WINTHROP CAPITAL INVESTMENTS: For the retail investor — this is different from institutional — for the retail investor the number-one way to do this is through diversification. So you want to make sure that you’ve got exposure to non-correlated assets. And the best non-correlated asset class to equities is still fixed income. To use derivative overlays like the institutional market is an expensive proposition, and it’s difficult when you cost-adjust it unless the retail investor has access to derivatives on a cost-effective basis.

GARRETT KEYES: How would an advisor go about implementing a hedge in a client’s portfolio?

JAY PESTRICHELLI, CO-FOUNDER, ZEGA FINANCIAL: A lot of folks will create protection through, say, diversification, right? Stocks, bonds, alternatives. But you know, if you look at the asset class performance in 2018, there weren’t very many asset classes that made money. Actually, at one point, stocks were down and bonds were down. So diversification didn’t provide the value that they might have thought.

So for us, we use options as a way to define our risk and still have upside exposure. So for example, we build portfolios that are aimed to not lose more than, say, 10% in a 12-month period.

GARRETT KEYES: Does this mean that actually implementing a hedge in clients’ portfolios can be very challenging for an advisor to successfully do?

GREG HAHN: Yeah, at the retail level, unless you have conviction. So doing — puts on the S&P 500 is an example, out of the money puts. You could do collared transactions. But the problem is when volatility spikes, the costs to do that and then to protect a diversified portfolio is expensive.

JAY PESTRICHELLI: The concept of why you should hedge is very — it’s obvious to professionals in the space. But the how you hedge, we feel options are the best way to do it. Protection, but still retain upside growth. And it allows you to stay invested and it allows you to sleep a little better at night.