Hansen & Associates, Planning today for a better tomorrow


Absolute Return Portfolio

Absolute Return Portfolio

Successful Investing is Managing Risk Effectively

 

Our tactical portfolios are designed to maximize growth in all market cycles and to minimize market risk in poorly performing markets. We do that through a tactical management approach.

Our core focus is on:

  • Growth
  • Preservation of Capital

We accomplish the portfolio management goals by:

Option Leveraging

  • Mitigate risk by utilizing options to leverage positions so you have little exposure to the market risk but with all the potential gain.
  • To create profits using a proprietary timing model to capitalize on both bull and bear market trends over the near and intermediate term.

Risk Hedging

  • Utilize hedging strategies that will further reduce risk and in many cases provide returns in a down trending market.

Reserve Components

  • Utilize up to 80% of the portfolio in low risk fixed income and cash allocations to mitigate risk exposure to the market.

This Is No Longer Your Father’s Stock Market

Everything Has Changed

Your Father’s Stock Market

  • Your father’s stock market rewarded Buy & Hold strategies.
  • Your father’s stock market believes Black Monday 1987 was devastating.
  • Your father’s stock market gained +2.03% the Black Monday year 1987.
  • Your father’s stock market brought no-load index funds to relevancy.
  • Your father’s stock market had time on its side.
  • Your father’s stock market was easier to predict.
  • Your father’s stock market had 1 trend in 20 years.
  • Your father’s stock market provided steady opportunity for upward growth.
  • Your father’s stock market made accumulation seem ski-jump-easy.
  • Your father’s stock market made retirement planning look simple.
graph of sp-500 1980 - 1999

Your Stock Market

  • Your stock market penalizes Buy Hold strategies.
  • Your stock market believes Black Monday was cute & cuddly.
  • Your stock market lost -38.49% in the Financial Crisis year 2008.
  • Your stock market makes no-load index funds irrelevant.
  • Your stock market lost over a decade?
  • Your stock market is entirely unpredictable.
  • Your stock market has already had 4 trends in under 10 years.
  • Your stock market has times-to plant and times-to-harvest.
  • Your stock market makes accumulation roller-coaster-complex.
  • Your stock market makes retirement treacherous.
graph of sp-500 1980 - 1999

Absolute Return Strategy

Absolute Return Portfolio

With nearly two decades of volatile and sometimes fiercely downward markets, we believe a philosophy different from the conventional approach is required to produce meaningful investment results. “Buy and Hold” strategies have disappointed investors for a generation, and simply aren’t enough when investing in today’s market.

Investment Objective

The goal of the Absolute Return Portfolio is to create profits using a proprietary timing model to capitalize on both bull and bear market trends over the near and intermediate term. Our objective is to attain net positive returns independent of overall stock market performance and regardless of market direction.

Investment Style

The strategy utilizes a proprietary timing model to determine the near and mid-term directional bias of the S&P 500, then purchases ETF put or call options to obtain either a long or short exposure to the market.

The portfolio will generally hold positions less than 120-days, and should be considered to be more aggressive given the shorter time horizon of its portfolio selections. At any given time, the fund’s equity component will vary widely within a range from 100% long to 100% short depending upon the prevailing risk-reward dynamic.

Options To Mitigate Risk

How We Use Options to Your Advantage

Many people mistakenly believe that options are always riskier investments than stocks. This stems from the fact that most investors do not fully understand the concept of leverage. However, if used properly, options can have less risk than an equivalent position in a stock.

What Is Leverage?

Leverage has two basic definitions applicable to option trading. The first defines leverage as the use of the same amount of money to capture a larger position. This is usually the definition that gets investors into trouble. A dollar amount invested in a stock and the same dollar amount invested in an option do not equate to the same risk. The second definition characterizes leverage as maintaining the same sized position in a security, but spending less money to do so. This is the definition of leverage that we apply.

Here’s how it works:

If you were going to invest $10,000 in a $50 stock, you would receive 200 shares. However, instead of purchasing the 200 shares, you could also buy two call option contracts. By purchasing the options, you spend less money but still control the same number of shares. The number of options you purchase is determined by the number of shares that could have been bought with your investment capital, in this case $10,000.

An Example

Say that the options cost $2.00 per contract. To control 200 shares of the stock, you would need to purchase two contacts at a total cost of $400. For the small sum, you now control $10,000 in stock, but at a much lower cost. That calculates into a savings of $9,600 on your capital outlay for the purchase.

This savings can then be used to take advantage of other opportunities in the fixed income arena, thereby providing you with greater diversification and lowering your portfolio’s overall risk profile. The collection of the interest from the savings you’ve made by using options for your purchase creates what is known as a synthetic dividend.

What is Hedging?

Hedging is the calculated installation of protection and insurance into a portfolio in order to offset any unfavorable moves, and is designed to reduce or eliminate financial risk.

We actively pursue this strategy by using a proprietary model to determine when markets have become near-term overextended, then enter transactions that we believe will protect against portfolio loss through a compensatory price movement. Put simply, our hedging strategy warns us of impending market downturns, and prompts us to purchase put options that will rise as the current equity position falls.

Why Hedge?

Most investors who buy and hold for the long term are counseled to ignore the short and mid-term fluctuations along the way. They completely ignore the necessity of hedging under the false sense of security that the stock markets will rise over time without fail.

 

While this may arguably be true over the long term – of about 20 to 30 years, short term declines of up to a couple of years can and do happen, and they can destroy portfolios that are not hedged. Not hedging in the markets today is similar to not buying accident insurance because you’re a careful driver who always obeys the rules. There’s never a guarantee that unforeseen circumstances won’t happen.

Consider this chart of the 2008 financial crisis:

Chart of the 2008 financial crisis

As an investor, how did your portfolio fare during the crisis? As you can see, hedging downside risk can make the difference between you getting to retire this year, or having to put it off until further down the road. Strategic purchases of SPDR S&P500 (SPY) puts during the above periods would have mitigated much of the damage caused by market declines, thus protecting the portfolio and adding to overall portfolio performance.

80/20 Portfolio

80/20 Portfolio pie chart
 

 10% Long/Short Strategied

 

 

 5% Weekly/Monthly Option Strategies

 

 

 5% Passive Income Strategies

 

 

 10% Cash

 

 

 70% Fixed Income Component

 

80/20 is 80% Fixed Income Component plus Cash and 20% Option Strategies.

70/30 Portfolio

70/30 Portfolio pie chart
 

 15% Long/Short Strategied

 

 

 7% Weekly/Monthly Option Strategies

 

 

 8% Passive Income Strategies

 

 

 10% Cash

 

 

 60% Fixed Income Component

 

70/30 is 70% Fixed Income Component plus Cash and 30% Option Strategies.

60/40 Portfolio

60/400 Portfolio pie chart
 

 20% Long/Short Strategied

 

 

 10% Weekly/Monthly Option Strategies

 

 

 10% Passive Income Strategies

 

 

 10% Cash

 

 

 50% Fixed Income Component

 

60/40 is 60% Fixed Income Component plus Cash and 40% Option Strategies.

Long/Short Component

  • Utilizes a proprietary timing model to determine the near and mid-term directional bias of the S&P 500, then purchases ETF put or call options to obtain either a long or short exposure to the market.
  • Will leverage assets by utilizing options therefore exposing a small portion of the portfolio assets to
    market risk.

 

Fixed Income Reserve Component

  • A safe conservative base of assets that does not correlate to the equities market therefore providing additional
    risk mitigation.
  • Goal is to seek attractive yields in a variety of fixed income instruments with a short duration structure to
    eliminate the risk associated with rising interest rates.
  • Seeks yields of 3% – 6% long term.

 

Cash Component

  • Designed to provide liquidity for withdrawals or to weight other areas of the portfolio to further increase
    growth and/or reduce risk.

About Portfolio Manager David Yelle

David is an investment professional with over 24 years experience. His career spans a wide spectrum of finance, ranging from that of a traditional Investment Advisor, to an exchange floor Trading Specialist, to Hedge Fund trader. His extensive background has given him the opportunity to trade on virtually every market in almost every country around the globe at some point in his career.

In addition to his professional career in the global capital markets, David also served for 17 years in the military, primarily with naval special operations. Not only did the military provide him with the fundamental underpinnings of discipline and self-motivation, but the experience ignited a passion for global affairs for him, which has easily translated over into the field of global finance. It’s given him a unique perspective on world affairs and the impact of global events on the financial markets.

Prior to joining Hansen & Associates, David worked for a large multinational bank, where he actively developed and executed equity, derivative and currency trading strategies for the bank’s investment management team. He also designed and managed a proprietary “portfolio insurance” product, which he used to hedge the bank’s investment portfolios against market declines. In that role, he managed all facets of the hedging process, including portfolio construction and all active trading.

David has now brought his knowledge and experience to Hansen and Associates, where he has applied his concepts to develop a range of investment products focused on mitigating investment risk and maximizing returns through tactical asset allocation.