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
Risk Aware – We focus on capturing SMART yield
At Sagewood, we are dedicated to isolating and capturing the yield available through the Volatility Risk Premium (VRP). To do that, we manage the Volatility Yield Strategy (VYS), which we designed as an options-based overlay, so it works alongside any existing portfolio and requires no upfront capital.
While investors may be taking on stock risk or fixed income interest-rate or credit risk as they search for yield, our VYS investment process is designed to offer investors SMART yield:
S
Strategic. It works as part of an overall portfolio allocation because it has typically shown relatively low correation to traditional asset classes and has no credit or intererst-rate risk.
M
Market neutral. Our goal is to generate yield by isolating the VRP, not by making a specific forecast on the future level of the S&P 500 Index.
A
Actively managed. Our approach is guided by a quantitative investment process designed to continuously evaluate opportunities.
R
Risk managed. We have client-exposure limitations and a bias toward limiting losses in extreme markets.
T
The Options Strategy that Drives VYS
We seek to generate yield by capturing the VRP. To do this, we utilize an Iron Condor options strategy, which means we create four options—two puts (one long and one short) and two calls (one long and one short) at four different strike prices.
We sell options (our short calls and puts) to generate option premium
We simultaneously buy options (our long calls and puts) to contain and quantify risk
To understand how each of the VYS option positions work in the portfolio, consider the illustrative example below. Assume that when we establish our option positions, the S&P 500 is trading at 2,500.
At Initiation
SELL
We sell (are short) a put and a call with strikes in a range around the current S&P 500 level, 2,450 for the short put and 2,550 for the short call in our example.
BUY
We buy (are long) a put and a call with strikes further away from the current S&P 500 level, 2,250 for the long put and 2,750 for the long call.
COLLECT
Position Objectives
Short Call/Short Put: Generate income
Long Call/Long Put: Cap downside risk
Max Profits
Market stays within short strike range (2,450 and 2,550 in this example)
Risks
If market rallies or falls through breakeven point
This profile is for illustrative purposes only and is not indicative of the performance of any particular option position. ITM (In The Money).
When will VYS profit?
VYS will realize maximum profit if the S&P 500 Index remains between the short put and call strike prices at expiration (this de facto also means the longs will expire out-of-the-money). VYS can achieve the max profit whether the S&P 500 goes up or down, as long as it does so within a range defined by the strikes of the two short positions.
When will VYS lose?
VYS will lose if the S&P 500 Index falls outside the short put and call prices at expiration. Imagine that the day after we enter into the positions above, the S&P 500 trades down from 2,500 to 2,460. What happens to the probability that our short put will expire in the money as a result? It has increased and the dollar price of the option we sold has increased. When the dollar price of something you sold increases, you lose money. As a result, this structure will report a mark-to-market loss.
VYS: A Differentiated Approach
The Iron Condor is not unique to Sagewood’s Volatility Yield Strategy, but there are aspects of the process of managing it which are.
The market for S&P 500 Index options is massive. We use proprietary quantitative models to identify which specific puts and calls we want to be long and short, using relative-value metrics based on real-time data.
We are active managers. We dynamically rebalance the portfolio, based on our proprietary risk analytics, in an effort to limit the portfolio’s sensitivity to the underlying market.
Our competitive advantage is our investment process, which seeks to maintain our exposure to the VRP, mitigate drawdown risk, and lower portfolio return variation.
The Sagewood team has honed our approach over time, as we are among the pioneers in designing strategies to capture the VRP.
Our CIO, Defina Maluki, launched his first strategy in 2007.
In the years since, the Sagewood team has navigated multiple stock market shocks, historic sovereign interest rate actions, and market rallies across asset classes.
We believe our approach has withstood the test of time.
Since 2007
Capturing the VRP
We manage VYS to source return via the VRP so the most critical driver of our results is the level and direction of the VRP. On avearge, as the VRP expands, our return expands as well. For example, consider the chart below, which shows the relationship between Modeled Strategy net of fee results and the VRP.
For actual VYS perfomrance, please contact Sagewood.
Average Annualized Modeled Strategy Net Return in Various VRP Environments
October 2007 — June 2020
| Greater than -2% | Between -2% and 1% | Between 1% and 3% | Between 3% and 4.5% | Between 4.5% and 5.75% | Between 5.75% and 8% | Greater than or equal to 8% | |
| Number of Observations | 390 | 354 | 439 | 437 | 430 | 602 | 557 |
| Frequency | 12% | 11% | 14% | 14% | 13% | 19% | 17% |
Source: Bloomberg, VRP calculated using SPX Index & VIX (Daily). Average Annualized Modeled Strategy Net Return calculated by averaging Modeled Strategy net returns within a given range of VRP. Modeled Strategy returns are annualized.
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.
