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This Fund Uses Options to Tamp Down Equity Risk

This Fund Uses Options to Tamp Down Equity Risk

Tayfun Icten: Bronze-rated JP Morgan Hedged Equity fund provides a smoother ride for equity investors by combining a long equity exposure with an option overlay.

The fund gives up some of the equity upside, but also mitigates the downside risk. On a three-year basis, it produced a 7% annualized return with 6% standard deviation. In that stretch, it generated better risk-adjusted returns than the S&P 500 index, and ranked among the top three funds in its Option Writing category in terms of absolute performance.

Hamilton Reiner and Raffaele Zingone comanage this fund. Zingone runs a 100% long equity portfolio, which closely replicates the S&P 500 Index. Reiner is responsible for day-to-day management, and implements a disciplined option overlay which is reset on a quarterly basis, without any market-timing. The option strategy is designed to provide downside protection in market turbulence where the S&P 500 index declines from 5% to 20% in a given quarter. This outcome-oriented fund targets a risk/return profile similar to a 60/40 portfolio, and roughly half the volatility of S&P 500 Index.

This is one of the cheapest funds in the Option Writing category, managed by experienced people with good resources. Investors who look for a 60/40-like risk/return profile, without the duration risk, should consider this fund.

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About the Author

Tayfun Icten

Senior Analyst

Tayfun Icten is a senior analyst, manager research, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers alternative strategies.

Before joining Morningstar in 2016, Icten was a managing member of Alpha Performance Partners, an alternative investment specialist firm. From 2004 to 2009, he served as director/portfolio manager for XE Capital Management LLC, a fixed-income, multi-strategy hedge fund where he managed $150 million multi-strategy portfolio. Before joining XE in 2004, Icten was a vice president/portfolio constructor for Zurich Capital Markets (ZCM) Asset Management Group. At ZCM, he also performed due diligence on the firm’s overall hedge fund exposure, including structured product deals.

Earlier in his career, Icten was a derivatives trader for Millburn Corporation; a research analyst for the CISDM (the Center for International Securities and Derivatives Markets, a university sponsored-alternative investment research center) where CAIA Association originated; and an assistant bond trader for JPMorgan Chase & Co. in Istanbul.

Icten holds a bachelor’s degree in finance, cum laude, and a master’s degree in business administration from the University of Massachusetts at Amherst. He also attended the Bosphorus University Physics Department (the top Physics program in Turkey) before he transitioned to finance.

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