Beta Management Overlay
Market beta can be friend or foe…in rising markets, beta may contribute a large portion of the return in an index fund and nearly all of the return in an actively managed fund or portfolio. In declining markets, however, negative beta is a drag on return and obscures manager selection skill.
Portfolio managers tend to measure their performance on a relative basis, while investors tend to measure performance on an absolute basis. Investors want a better return than the particular benchmark in rising markets but don’t want to lose any of their investment when markets decline.
Beta Management comes in many forms: options overlays, smart beta tilts, sector rotation, tactical allocation and short investing, among others. Little Harbor’s approach to beta management employs advanced Bayesian statistical techniques, including state-space modeling, incorporated into a quantitative program that seeks to modulate net exposure to equity beta over time. Typically employed as an overlay to an otherwise long-only portfolio, the quantitative program determines a price direction of a particular trading market, long or short, on a daily basis along with an allocation decision based on a confidence factor. As an overlay onto a long or long-short equity portfolio, the goal is to reduce left tail risk by selling beta on days when a particular trading market is declining, with the potential to enhance performance by buying additional beta (leverage) on days when a particular trading market is rising.
A Beta Management Overlay strategy can be custom configured. One version of a Beta Management Overlay strategy obtains exposure (long or short) to the S&P 500® Index through investing in an exchange-traded fund that tracks the S&P 500® Index. The track record for this strategy is available to qualified investors for review upon request and delivery of a non-disclosure agreement.