The Problem:
Yield is scarce and often comes with traditional asset class risks.
Our Solution:
Capture a Distinctive Yield Source
The Problem:
Yield is scarce and often comes with traditional asset class risks.
Our Solution:
Capture a Distinctive Yield Source
Capital Efficient – We utilize a capital efficient vehicle
Yield-seeking investors today are facing two challenges
Yields across the traditional investment landscape are very low, yet the need for income remains a strategic objective for many individuals.
Even if attractive yield investments are available, selling positions to raise the capital needed to invest in them is unappealing; not only does that risk triggering a tax liability, but it also requires altering the make-up of the portfolio.
An innovative approach to addressing both of these challenges can be found in a yield-oriented strategy delivered as an overlay, which requires no new capital.
We believe the overlay offers compelling benefits today…
Highly Capital-efficient
The overlay employs derivatives—options, specifically—to pursue yield. The options are traded in a separate account and linked to the investor’s underlying portfolio. The underlying portfolio acts as collateral so there is no upfront cash required to initiate the overlay, nor are there any initial borrowing costs.
*No margin interest is incurred unless there is a debit balance in the option account.
Tax Efficient
Pursuing yield through an overlay is tax efficient. Since none of the underlying portfolio needs to be sold to fund the overlay, no taxable event is triggered. Further, the yield itself may be taxed as a blend of long-term/short-term capital gains, not income.1
1This does not represent tax advice, which can only be rendered by accountants and tax advisors.
Preserves Investor’s Portfolio Control
The use of an overlay strategy means the underlying portfolio remains intact and the investor maintains control over it.
Straightforward Overlay Funding
The process of funding and managing the overlay is simple and can be tailored to each client situation.
Capital-efficient
+
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Highly Capital-efficient
The overlay employs derivatives—options, specifically—to pursue yield. The options are traded in a separate account and linked to the investor’s underlying portfolio. The underlying portfolio acts as collateral so there is no upfront cash required to initiate the overlay, nor are there any initial borrowing costs.
*No margin interest is incurred unless there is a debit balance in the option account.
Tax
Efficient
+
Read More
Tax Efficient
Pursuing yield through an overlay is tax efficient. Since none of the underlying portfolio needs to be sold to fund the overlay, no taxable event is triggered. Further, the yield itself may be taxed as a blend of long-term/short-term capital gains, not income.1
1This does not represent tax advice, which can only be rendered by accountants and tax advisors.
Preserves Investor’s Portfolio Control
+
Read More
Preserves Investor’s Portfolio Control
The use of an overlay strategy means the underlying portfolio remains intact and the investor maintains control over it.
Straightforward
Funding
+
Read More
Straightforward Overlay Funding
The process of funding and managing the overlay is simple and can be tailored to each client situation.
The Mechanics of Funding and Managing an Overlay
Evaluate Existing Portfolio
- What is the portfolio comprised of?
- What is the overlay’s goal vis a vis the portfolio?
Determine Available Margin Release Value
- Custodian has set margin buying power for a broad range of asset types
- Apply them to asset mix of the underlying portfolio to establish how much is available for the overlay’s notional exposure
Determine Appropriate Exposure Value
- Given the investor’s return targets, risk tolerance, and liquidity requirements size the degree of appropriate exposure
Assign Assets as Collateral at Custodian
- The custodian links the collateral account and the overlay account
Manage & Report on Overlay
- The manager of the overlay runs the strategy
- Reporting occurs along with investor’s other portfolios
Implementation Considerations
It is important that Advisors properly size the overlay in relation to each client’s underlying portfolio.
As with any investment, there are a range of risk considerations that need to be evaluated in any specific client context. Broadly speaking, as our overlay uses options, it may be best suited to more sophisticated investors with portfolios in excess of $5 million.
Have questions? Ready to talk?
Contact Sagewood at
[email protected] or (212) 231-8770
Want to learn more?
Meet the Sagewood Team
The team at Sagewood Asset Management offer a yield-oriented strategy in an overlay. Sagewood’s strategy aims to add yield to fixed income, equity, cash or diversified portfolios, without incurring the idiosyncratic risks of equities or fixed income.
