JPMorgan Hedged Equity Fund 2 and 3 provide investors with smoother equity returns by tempering both downside and upside returns via a systematically implemented options strategy. Consistent execution by an experienced team and reasonable fees add to their strengths.
JPMorgan launched Hedged Equity Funds 2 and 3 shortly before soft-closing the original Hedged Equity fund in March 2021. They all follow the same portfolio construction process but with different schedules for implementing the three-month option overlays. Instead of purchasing options on the last business day of the quarter, Hedged Equity Fund 2 purchases them on the last business day in January, April, July, and October, and Fund 3 trades its options on the last business day in February, May, August, and November.
The managers start with an equity portfolio that closely mimics the S&P 500 but with small tilts toward stocks they believe are attractively priced. To temper downside risk, the team purchases put options with strike prices 5% below the S&P 500’s market value at the start of each three-month period. To offset part of the cost of the put option, the team first sells put options 20% out-of-the-money. This structure should generally protect the fund from losses between 5% and 20% in any given three-month period. If markets fall less than 5%, the fund should closely track the S&P 500. If the market falls more than 20%, the fund will begin participating in losses once again, maintaining a roughly 15-percentage-point advantage over the market. To further offset the cost of the long put position, the team also sells call options that generate enough option premium income to cover the remaining cost of the hedge.
Hamilton Reiner runs the show here. The lead manager and architect of the strategy joined JPMorgan in 2009 and has more than three decades of equity and options trading experience. He is supported by comanager Raffaele Zingone and more than 20 JPMorgan equity analysts who implement the low-tracking-error equity portfolio the options are built around.
As designed, the options overlay tempers upside returns in exchange for downside protection, leading to both funds outperforming the S&P 500 during the 2022 meltdown. Over the short term, the return profiles may vary from the original Hedged Equity fund depending on the price path of the S&P 500, but over the long run, all three funds should have very similar risk/reward characteristics. Reasonable fees coupled with JPMorgan’s transparent process make these funds a strong option to help investors remain invested during challenging markets.