O conceito de "Overlay"

Artigo do HedgeWorld explicando o conceito de overlay.

An Overview of the Overlay's Many Uses

By Emma Trincal, Senior Financial Correspondent | Monday, June 11, 2007

NEW YORK (HedgeWorld.com)—Separation of alpha and beta is the mantra du jour in portfolio management, though the concept is hardly a new one. Portable alpha and hedge fund replication indexes are some common applications of the idea. One investment tool at the heart of those variable applications is the overlay. Known mostly for its protection against downside risk, the overlay is also used to actively manage a portfolio and can be applied to portable alpha portfolios or asset allocation rebalancing.
An overlay is often defined as a hedge. For instance, a manager with a market exposure to the Standard and Poor's 500 stock index will need to protect his portfolio against a stock market decline. One way to do that is by buying a put option on the index as puts are bets on a price decline. In such case, if the S&P drops, the put will offset the losses in the portfolio. In this example, the put option is the derivative overlay.

"Overlay is derived from the same concept as portable alpha. But with an overlay, you neutralize the market exposure; you use it as a hedge," said Olivier Le Marois, chief executive of Riskdata S.A., a Paris-based provider of risk management solutions. "Investors add derivatives overlay to their portfolios in order to actively manage market risk."

His firm recently implemented an overlay instrument with the upgrade of its flagship risk management system FOFiX Previous HedgeWorld Story.

An overlay may be used to avoid redemptions. If the market turns the wrong way, a manager can protect himself from redemptions by limiting market exposure and hedging the risk. In a similar fashion, an overlay can be used to manage liquidity risk. "If a portfolio is illiquid and turns sour, don't liquidate it, just hedge it." said Mr. Le Marois.

Finally for risk managers, an overlay is useful as a tool to compare two managers. Mr. Le Marois gave the example of two different portfolios. How does one compare a market neutral portfolio generating a flat return with another portfolio, highly correlated to the market, using options on the Nasdaq composite index and generating double-digit performance? The only way to do that is to hedge both portfolios. The first one does not need an overlay since the style is market neutral. Riskdata applied an overlay on the second portfolio in order to hedge it and to compare apples to apples. The firm found that the second portfolio continued to perform better than the first one, on a risk-adjusted basis, even if the performance gap between the two was now reduced. The result is interesting because although the market neutral portfolio had flat performance, it generated alpha, while the second used a strategy that was based on pure market exposure.

But an overlay is not just used as a hedge for downside protection or as a risk measurement tool. Many find it applicable for active management purposes as well.

"The uses of overlay are almost endless," said Robert Kulperger, vice president of marketing at Northwater Capital Management Inc., a $9.2 billion asset management firm that specializes in portable alpha and overlay strategies.

An overlay can be used in the implementation of portable alpha programs.

"Portable alpha typically combines an alpha exposure obtained through an alternative investment such as a fund of hedge funds, direct hedge funds, private equity or real estate and beta exposure through a derivative instrument, such as a futures contract or swap. People often refer to the beta exposure as a type of overlay," said Mr. Kulperger.

Another important application, Mr. Kulperger said, is as a tool to rebalance a portfolio. When an institutional investor's allocation to a particular asset class is off-target, the use of an overlay trade may allow that investor to fill the gap in the interim, Mr. Kulperger said. For instance, an investor may have a 30% equity target allocation but may currently have only 25% in the class because a manager was terminated or because of underperformance of the asset class. By using derivatives, the institutional investor may be able to quickly add the extra 5% exposure. The same type of trade may be employed at the end of the year to quickly rebalance a portfolio back to its strategic allocation, he said.