Lamco Advisory Services Inc. will be the first independent advisory firm to start allocating client assets to an ETF option overlay strategy managed by MDE Group Inc.
The move by Lamco, a firm with $1.6 billion under advisement, represents the most recent example of the growing appetite for alternative strategies among the financial planning community.
“This is something that will help mitigate downside risk and give a performance accelerator,” said Lamco president Mark Lamoriello.
“From our standpoint, this looks like a chance to earn a 7% to 8% return without a lot of volatility,” he added. “We think products like this will probably become more prevalent down the road.”
MDE Group, which has $1.3 billion under management, launched its Planned Return Strategy in August 2009 as a core allocation for its clients.
Rolling it out to the broader financial planning community was inspired in part by the current market conditions, according to Mitchell Eichen, MDE Group founder and chief executive.
“We started to carefully look at doing something like this as early as 2000, but the math [and market conditions such as volatility] had to be right,” he said.
The platform employs a basic collar option strategy, which uses put and call options on the SPDR S&P 500 Ticker:(SPY), an exchange-traded fund that acts as a proxy for the S&P 500.
A collar strategy involves selling a call option for a “strike price” above the current market price of an underlying security and simultaneously buying a put option at a below-market price.
While the call option part of the collar will limit the upside gain, the sale of the call helps to finance the cost of the put option, which limits investment loss.
The collar is a conservative strategy that represents just one of the myriad ways to use puts and calls to tailor or enhance an investment.
Mr. Eichen refused to lay out specific details of how his strategy is using options to manage and hedge risk, but he is hopeful that it could become a replacement for more core investment holdings.
For MDE Group’s current separately managed account clients, “we’re replacing all or most large-cap-equity investments with this strategy,” he said.
Like many of the alternative strategies now gaining momentum among financial advisers, the option collar is seen as a means of helping investors to “re-engage in the market,” according to Mr. Eichen.
Mr. Lamoriello said his move into the strategy will begin within the next few weeks, “after the lawyers are finished going over all the details.”
Like many of the alternative strategies he has started using, the option collar model was brought to his attention by an existing client.
“A client brought it to us because they had an interest in it,” he said.
Mr. Lamoriello said he will start slowly with “two or three clients, and then we’ll let it run for six months” before introducing it to other clients.
“With something like this you need to consider the unknown unknowns, and that means understanding the worst-case scenarios and getting clients comfortable with it,” he said. “We know that words like options, futures and derivatives can make people uncomfortable.”