DNA of a Manager Search: Equity Overlay

DNA of a Manager Search: Equity Overlay

Derivatives-based overlay strategies to protect against equity losses have become increasingly popular through the past twelve months among bfinance clients. The decision to apply a more explicit risk control approach involves a number of critical technical and strategic choices, illustrated through one investor’s case study.

Equity Overlay


Six key questions. How long do we want the protection to last? How much manager discretion is appropriate? What costs are we willing to bear? Where do we want to place the strikes? How should collateral be treated? How closely should the protection map my portfolio?

Manager selection. While most providers appear to offer broadly similar capability, closer examination reveals clear differences in approach, such as preferred choice of instruments and willingness to support investors throughout the life of the overlay.

No jargon. Put-spread collars, synthetic equity, static versus dynamic approaches and more, explained in clear simple terms.

Equity Overlay


Investors are seeking more explicit forms of protection as the era of artificially-stimulated asset prices gives way to rising market volatility. While many sophisticated investors have spent the past decade building up “implicit” downside protection in the form of diversifying strategies, 2018 saw pension funds and other asset owners increasingly turning towards more explicit safeguards.

The decision to apply a protective overlay involves a number of critical choices, not just from a technical standpoint but also from the perspective of governance and stakeholder buy-in. These can include the decision to use single-period versus multi=period overlays, the degree of customisation, where to place caps, how to handle margining requirements and much more.

Important Notices

This commentary is for institutional investors classified as Professional Clients as per FCA handbook rules COBS 3.5R. It does not constitute investment research, a financial promotion or a recommendation of any instrument, strategy or provider. The accuracy of information obtained from third parties has not been independently verified. Opinions not guarantees: the findings and opinions expressed herein are the intellectual property of bfinance and are subject to change; they are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. The value of investments can go down as well as up.