Volatility Overlay is a strategy that aims to reduce the impact of falls in the equity market in a cost efficient manner through the dynamic use of options and futures. An equity investment with volatility overlay allows investors to maintain the exposure they need to grow assets, while providing a buffer that aims to limit the impact of downside moves in the market.

Why Overlay?

We believe the mitigation of capital loss is more important to long term capital appreciation than the ability to maximize returns in rising markets. This is because the negative effect of compounding means the ability to recover from losses grows exponentially more difficult the larger losses become.

Key features of Triple3’s Volatility Overlay programs include:

  • Addresses sequencing risk issues
  • Minimise portfolio drawdowns
  • Low management fees with no performance fees
  • Can operate within a Client’s risk budget
  • Able to capture market rises and minimise cost of protection
  • Can be configured to suit underlying portfolio or individual requirements
Loss Gain needed to recoup loss
10% 11%
20% 25%
30% 43%
40% 67%
50% 100%

Investment strategy

Simulated impact of 80% capture up and 40% downside protection on S&P 500 (when its monthly returns are above 2% or below -2% respectively; otherwise 0% return is assumed). Source: Bloomberg and Triple3

To achieve portfolio protection in a cost efficient manner, we target downside savings that are larger than the drag on performance in bullish periods. Specifically, over the long run we aspire to capture 80% of the upside and provide 40% savings when the market falls significantly.

Triple 3 Partners is Authorized and Regulated by the ASIC in Australia. AFSL 337236.
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