HL Opportunity Fund L.P. A “Smart”, Covered Call Strategy June 2015.
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Transcript of HL Opportunity Fund L.P. A “Smart”, Covered Call Strategy June 2015.
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HL Opportunity Fund L.P.
A “Smart”, Covered Call Strategy
June 2015
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HL Opportunity Fund
Strategy definition:
The Covered Call strategy is a well-known conservative investment strategy
that holds underlying stocks and sells call options on those same stocks in
order to earn extra income.
HL Opportunity Fund (HLOF) has a next generation, systematic approach
to the covered call strategy and has developed an algorithm to deploy the
strategy. The Fund owns 30-100 underlying stocks and executes the covered
call strategy based on pre-set rules. A computer algorithm generates all
trades.
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HL Opportunity Fund
The “smart” elements:
1. SystematicHLOF has developed proprietary software that generates all trades based on pre-set rules. There is an algorithm that buys, sells or rollsindividual calls when certain criteria are reached.
2. HedgingThe Portfolio hedges its long positions using sector ETF’s. The hedge isdynamic, ranging between 40-80% of the Portfolio’s long value.
3. Risk ManagementOur proprietary software manages risk for the strategy. The risk guidelines are set with the aim of reducing drawdown by 70% or more.
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HL Opportunity Fund
Description: Systematic covered call strategy
Target annual net return: 5-8% p.a. (after all fees)
Target drawdown: -5% (daily peak-to-valley)
Target SD: <50% of the S&P standard deviation
Portfolio characteristics:
1) 30-100 blue chip, large cap US stocks
2) Call options written on each stock, 1-3 months from expiration
3) Hedging using large ETF’s
4) 5-8 different sectors
5) No high-frequency trading. Individual options are typically rolled one-two times per month in order to obtain optimum returns.
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HL Opportunity Fund
What we look for in individual positions:
Broad coverage of the S&P universe, with 5-8 of the top-10 S&P 500 sectors
Diversification in each sector, with 10-20 names in each sector
Exposure to the largest, most liquid stocks in each sector
Liquid, highly traded single company call options
Hedging using highly liquid, sector ETFs
Base leverage: up to 1.6x, (longs = 90-160%, shorts = 40-80%, net = 20-80%)
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HL Opportunity Fund - Theory
HLOF’s portfolio has three elements:
1) Underlying large-cap, blue chip stocks
2) Written call options on those stocks
3) Hedges (liquid ETF’s)
The premise of the HLOF strategy is that call options on blue-chip stocks can provide 8-12% additional annual income.
a) In sideways markets, the stocks and hedges will tend to cancel each other out, allowing the call option premium to be captured.
b) In down markets, the call options and hedges should provide protection, potentially reducing drawdown by 70% or more.
c) In up-markets, the stocks should provide gains. The gains may be mitigated by losses in both the call options and hedges, potentially reducing stock gains by up to 50%.
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HL Opportunity Fund – Downside Protection
Hedges, as well as option income, provide downside protection in case of stock market drawdowns. The following drawdown analysis is taken from real data in a managed account.
a) During the worst period for stocks (-9.81%), the overall portfolio lost less than 1% due to hedges and premium income.
b) In the gold miner sector, as stocks lost more than -25%, the portfolio was down less than 7% in the sector, due to hedges and option income.
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HL Opportunity Fund YTD Performance graph – Total Portfolio
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HL Opportunity Fund Performance graph – Technology Sector
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HL Opportunity Fund YTD Performance graph – Energy Sector
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HL Opportunity Fund
Current Portfolio (31 May)Largest sectors:
1. Technology sector
2. Energy sector
3. Financial sector
4. Gold-Miners sector
Largest individual positions:
1. Apple
2. Schlumberger
3. Exxon
4. IBM
5. Chevron
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HL Opportunity Fund
Statistics HLOF ^BXM S&P 500
2015 YTD Gross Return (as of 30 June) 3.69% 3.67% 0.20%
2014 Gross Return 7.6% 5.6% 11.4%
Average monthly return since inception 0.9% 0.7% 0.9%
Cumulative return since July 2013 22.3% 16.8% 22.4%
Standard Dev of monthly returns 9.0% 5.8% 8.9%
Correlation to S&P 55.2% 78.1% 100.0%
% of S&P (upside capture) 99.5% 74.8%
% Positive months 56.5% 65.2% 65.2%
Annual Target return: Risk-free rate + 3-6%
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HL Opportunity Fund
The HLOF Fund methodology and software have been developed by the two joint principals, Hylton Peimer and David Linden. They have more than 20 years combined experience in capital markets.
David Linden is a CFA, with more than 20 years of experience in financial markets. He worked in both an investor relations and due diligence capacity for a large Fund of Funds from 2004 – 2014 (Tel Aviv, Israel). In this function, he inter-acted with a variety of international clients and performed due diligence on numerous, well-known hedge funds. He was the main analyst on the famous Paulson sub-prime trade, which was considered by many the best trade of the decade. Previous to this experience, Mr. Linden was Head of Equity Research for an investment bank in Tel Aviv. David has an MBA in Finance from Wharton School, where he graduated with Distinction. He also has an Undergraduate Degree from the University of Michigan. He lives in Israel with his family since 1996.
Hylton Peimer has an honors degree in Computer Science from RMIT, Australia. Hylton has worked in numerous Israeli high-tech startups building enterprise applications for Fortune 500 companies. His roles have included software development and managing development teams. During this time Hylton has developed a keen interest in investing, and a particular interest in equity options. He lives in Israel with his family since 1998.
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HL Opportunity Fund
Structure: Delaware Limited Partnership (USA)
Bank: Wells Fargo
Broker: TBD
Administrator: TBD
Legal: Schwell Wimpfheimer & Associates LLP
Subscriptions: Monthly, +7 days
Redemptions: Monthly, +7 days
Principals: Hylton Peimer & David Linden
Contact: [email protected] 315-210-8362
Fee structures: A (1.2% management fee/20% performance fee)
B (0% management fee/30% performance fee)