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Beta Management Overlay

Market beta can be a friend or a foe…in rising markets, beta contributes substantially 100% of the return in an index fund and nearly all of the return in an actively managed fund or portfolio. In declining markets, however, beta can drag on a portfolio manager’s security 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 benchmark in rising markets and 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. The Market State Overlay™ (MSO) is a quantitative management tool that seeks to modulate net exposure to equity beta in a portfolio using space-state techniques. It determines a price direction, 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 of the MSO 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 beta on days when a particular trading market is rising.

The MSO can be custom configured as an overlay. A track record for a separately managed account using the MSO and investing up to 200% long or short the S&P 500® Index through an ETF (SPY) is available to qualified investors upon request and acceptable non-disclosure agreement.

The term Market State Overlay is a term trademark protected by Little Harbor Advisors, LLC.

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