If asset flows can be trusted as a guide, the appetite among financial advisers for hedged-equity exposure is reaching a fever pitch, and that suggests plenty about the growing unease in the financial markets.
Exhibit A is the $7 billion Gateway Fund (GATEX), which took in more than a billion dollars last year by employing a strategy designed to capture at best about half the performance of the S&P 500.
“For our investors, their goal is not necessarily to capture 100% of upside of the market but to protect gains,” said Harry Merriken, chief investment strategist of Gateway Investment Advisers LLC, an affiliate of Natixis Global Asset Management SA.
Last year, the fund gained just 4.5%, while the S&P 500 gained 16%. And yet the money keeps pouring in.
It did better in 2011, when its 3% return beat the index's 2.1%.
“It is essentially a fourth asset class, to supplement cash, bonds and stock,” Mr. Merriken said.
The strategy employs put and call options on a portfolio of about 250 stocks that are managed as a proxy for the S&P 500. The fund's total return is enhanced through the sale of one-, two- and three-month call options, while the downside is limited through the purchase of put options.
The five-year annualized return is 1.3%, compared with 3% for the S&P 500.
The 10-year annualized return is 4.1%, compared with 6.8% for the index. And the 15-year annualized return is 4.6%, versus 5%.
“We emphasize the low-volatility-to-equity aspect because people should realize the strategy is still correlated to equities, even if it is lower-risk,” Mr. Merriken said.
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