Liquid Strategies Insights & Commentary

Shawn Gibson

Shawn Gibson
After reaching a new all-time high in July, the S&P 500 Index sold off sharply at the beginning of August on a combination of US/China trade tensions and overall economic concerns.

Recent Posts

Market Bottoming Process

Author: Shawn Gibson

 

Given the high level of uncertainty regarding COVID-19, it is impossible to estimate what the final market bottom will be. The final low water mark will be a function of a number of factors, including, but not limited to:

1) The availability of widespread rapid testing

2) The development of treatments for patients having an adverse reaction to the virus

3) The timing of businesses reopening to once again allow consumer spending

4) The magnitude of financial and fiscal stimulus to provide relief to our citizens and businesses that are struggling during this shutdown

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Topics: Overlay

COVID-19 Update

Author: Shawn Gibson

 

Liquid Strategies is monitoring the spread of the COVID-19 outbreak, also known as coronavirus. We take seriously the health and well-being of our employees, clients and associates.

While there is currently no health or safety concern within our firm, we want to make sure you are aware that we are taking every precaution necessary. In the event there is an outbreak in our area, we have an emergency plan of action in place that would enable our portfolio team and staff to work remotely and continue to manage all client portfolios.

In light of the historic market volatility that has accompanied this outbreak, we want to update you on the actions we have taken and will continue to take for our overlay strategy. First, and most importantly, our thoughts and prayers go out to the families directly impacted by the coronavirus, both now and in the future. 

The extreme level of uncertainty and fear that has gripped the globe from a health perspective has spread to the global financial markets. Just as health officials are struggling with quantifying the impact of the pandemic, investors are faced with the impossible task of determining the potential financial impact of the virus on all businesses across all sectors and of all size. As such, it is impossible to know how to properly discount future corporate earnings, and therefore how to discount stock prices accordingly. It may take quarters or possibly even years to be able to look back and know the “right” discount of stock prices. This extreme uncertainty around future earnings has driven equity volatility to extreme levels not seen since the global financial crisis and near the worst that we have seen in our careers. This extreme volatility validates risk management as the top priority for our overlay strategy rather than return maximization. The primary elements of our risk management process are 1) defined risk through the use of constant hedging and 2) exposure management driven by our volatility risk model. All our positions have offsetting hedges which set clearly defined maximum losses for each position, protecting the portfolio against the type of gap moves down that have occurred over the past two weeks. These protective hedges proved to be a crucial line of defense during the drawdown. As an additional line of defense, we closely track equity volatility to identify periods where equity volatility is accelerating rapidly, a condition that is unfavorable to most strategies, not just the overlay strategy. Our risk model began to indicate high levels of market risk on February 24th and has remained in that condition since. This led us to reduce and then eventually close all of our overlay positions, providing another crucial backstop during this period of extreme volatility. The net result is, with losses in the equity markets now approaching 25% from the peak, the overlay strategy has lost less than 2.5% during this period. 

It is impossible to positively determine when and at what level the market will find a short-term bottom, let alone a long-term bottom. Until there is more clarity and volatility subsides, we will continue to execute our strategy with caution by continuing to focus on preserving capital while prudently adding new positions that can benefit from the extreme negative sentiment. 

As always, we are happy to visit with investors anytime to share our thoughts on the current environment.

Sincerely,

Brad Ball, Shawn Gibson, Adam Stewart and Justin Boller

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Topics: Overlay

Demystifying the "Fear Index"

Author: Shawn Gibson

 

The CBOE S&P 500 Volatility Index (the “VIX”) was given the label as the “Fear Index” decades ago even though most investors do not understand what the index represents or why it was given this nickname. In laymen’s terms, the VIX roughly reflects the expected volatility of the S&P 500 Index over the next 30 days, expressed in annualized terms. 

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Topics: Overlay

Put Writing as an Income Overlay

Author: Shawn Gibson

 

In a previous blog post (What is an Overlay?), we discussed how investors who utilize overlays do so with the goal of reshaping the potential investment outcomes with the most common goals being:

  1. Generating supplemental income/return (typically through covered call or put writing strategies
  2. Reducing the risk of the existing portfolio beta exposure (typically through collar strategies)

For investors seeking additional income, it is our belief that the best way to achieve this outcome is through a disciplined put spread writing program that provides investors with a relatively conservative stream of income that supplements the income/total return of the assets in the underlying.    

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Topics: Overlay, Theta Income, Volatility

Manager Commentary - Q4 2019

Author: Shawn Gibson

The final quarter of 2019 was one of the significant milestones and achievements for Liquid Strategies, marking the 6th full year of managing a conservative, risk-controlled option writing overlay program designed to add excess return to fully invested portfolios with a modest increase in overall portfolio volatility. In addition to applying the overlay program on top of existing client assets on a customized basis, the application of the Overlay expanded to provide separate account and packaged solutions (funds and ETFs) to allow the overlay to sit on top of six core underlying sources of beta: 1) Large Cap U.S. Equity; 2) Small Cap U.S. Equity; 3) Non-U.S. Equity 4) Core Bonds; 5) Municipal Bonds; and 6) Short-Duration Bonds. For investors that would have been invested in these various strategies since the inception of the firm, below are the illustrative long-term performance results:

ANNUALIZED SEPARATE ACCOUNT ILLUSTRATIVE RETURNS (Net1)

11/01/2013 - 12/31/2019

  1 YEARS 3 YEARS 5 YEARS Inception to Date
Large Cap Equity + Overlay 34.35% 15.62% 13.90% 14.93%
S&P 500 Index  31.49% 15.27% 11.70% 12.68%

 

Small Cap Equity + Overlay 25.55% 8.72% 11.69% 11.86%
S&P 600 Index 22.78% 8.36% 9.56% 9.70%

 

Foreign Equity + Overlay 17.70% 10.74% 8.82% 8.05%
MSCI ACWI ex US 21.51% 9.87% 5.51% 3.95%

 

Core Bond + Overlay  11.25% 4.74% 5.36%  5.64%
Bbg Barc US Agg Index 8.72% 4.03% 3.05% 3.27%

 

Municipal Bond + Overlay  9.80% 4.96% 5.46% 6.25%
Bbg Barc Muni Bond Index 7.54% 4.72% 3.53% 4.23%


1
Net of fees assumes a 0.75% management fee applied monthly. These returns are illustrative, hypothetical numbers representative of two actual return streams (Liquid Strategies Overlay and the underlying index ETF). The numbers illustrate what would have happened had we taken the underlying index ETF returns and added Liquid Strategy Overlay returns to them. Source: Morningstar, Liquid Strategies.

OVERLAY + SHORT DURATION FIXED INCOME ANNUALIZED PERFORMANCE (Net2)

11/01/2013-12/31/20191

  1 YEAR 3 YEARS 5 YEARS Inception to Date
Theta Income Strategy 6.90% 2.50% 3.36% 3.13%

2Net of fees assumes a 1.00% management fee. 

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Topics: Overlay, Volatility

What is an Overlay?

Author: Shawn Gibson

The term “Overlay” has been used multiple ways in the investment management industry, but when we think of the term, we envision a fully-invested investment portfolio with an options-based strategy that sits on top of the portfolio. This overlay effectively converts a two-dimensional investment portfolio into a three-dimensional portfolio where the 3rd dimension (the options overlay) alters the risk/reward profile of the overall combined portfolio. Investors that utilize overlays generally do so with the goal of reshaping the potential investment outcomes with the most common goals being 1) generating supplemental income/return (typically through covered call or put writing strategies); and 2) reducing the risk of the existing portfolio beta exposure (typically through collar strategies).

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Topics: Overlay

Theta Income Strategy - Q3 2019 Commentary

Author: Shawn Gibson

In a choppy quarter marked by large moves within a defined trading range, the Theta Income Strategy was able to generate a net return of 1.26% for the quarter, bringing the YTD net return to 5.31%. On a longer-term basis, the Theta Income Strategy has the ability to generate attractive absolute and risk-adjusted returns relative to bonds partially due to focus on risk control and volatility mitigation in the Strategy. The volatility relationship between the Strategy and bonds continues to trend very favorably so far in 2019. From the start of the year through 9/30/19, the annualized standard deviation of the daily returns of Theta Income has been only 2.06% compared to 3.30% for the Bloomberg Barclay’s US Aggregate Bond Index. These results are supportive of our ongoing effort to generate the highest returns per unit of risk.

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Topics: Theta Income

Theta Income Strategy - Q2 2019 Commentary

Author: Shawn Gibson

 

Although the quarter included a sharp volatility spike in May and overall large swings in the equity markets, the Theta Income Strategy was able to generate a net return of 0.94% for the 2nd quarter, bringing the YTD net return to 4.00%.  On a longer-term basis, the Theta Income Strategy continues to provide compelling absolute and risk-adjusted returns relative to bonds.

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Topics: Theta Income

Theta Income Strategy - Q1 2019 Commentary

Author: Shawn Gibson

The Theta Income Strategy was able to capitalize on the normalization of volatility to generate a solid net return of 3.02% for the 1st quarter after an extremely challenging environment in 2018.  On a longer-term basis, the Theta Income Strategy continues to provide compelling absolute and risk-adjusted returns relative to bonds.

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Topics: Theta Income

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