The Income and Protection Strategy (“Strategy”) is engineered with an aim to provide 65 – 95% gains following unusually sharp quarterly declines; this rules-based formula is also geared to generate strong annualized profits after bullish quarters.
The program is also designed to benefit from a favorable asymmetric relationship between cash drawdowns and market value.
Importantly, the Strategy deploys only 20% of the fund’s book value (profits are not reinvested). This speaks to an unusual risk/reward ratio.
The Strategy’s rules-based solution seeks to exploit the relationship between shorter and longer-dated Dow & S&P index put options. The Strategy employs a formula that earns ongoing income, to establish leveraged insurance against sharp equity index declines.
Therefore, since positive quarters are engineered to result in an increased probability for gains, this rules-based program does not represent a holding that is dependent on bad markets.
Having subjected the trade program to stress tests within the post-2009 bull market, the Manager was able to conclude that the fund should be profitable in all markets over any reasonable period of time. The Strategy was not simply run through back-testing scenarios utilizing ‘cherry picked’ periods. Analysis was conducted on how the Strategy behaved from ‘trough to peak,’ as well as ‘peak to trough’ periods, within the decade-long bull market (research available upon request).
To benefit from superior pricing when repositioning after sizeable gains are realized as a result of a sharp market decline, the Strategy’s rules-based criteria includes a VIX component.