Q: Hello,
I have been reading up on this fund, and comparing it to other covered funds. This one utilizes a strategy whereby they generate income (currently ~ 11% yield) by writing puts. This fund is currently 75% written puts. My sense is that when this strategy is coupled with a long equity strategy, you still have similar downside (less the premiums you receive via selling the puts), but your upside is capped. Works if markets are not overly volatile and remain range-bound. But I think things could go really wrong quite quickly in a volatile downward trending market. It seems to me that the fund is short volatility, which could cause serious distress in the fund vs writing covered calls.
Have I got this right?
Appreciate your thoughts as always.
I have been reading up on this fund, and comparing it to other covered funds. This one utilizes a strategy whereby they generate income (currently ~ 11% yield) by writing puts. This fund is currently 75% written puts. My sense is that when this strategy is coupled with a long equity strategy, you still have similar downside (less the premiums you receive via selling the puts), but your upside is capped. Works if markets are not overly volatile and remain range-bound. But I think things could go really wrong quite quickly in a volatile downward trending market. It seems to me that the fund is short volatility, which could cause serious distress in the fund vs writing covered calls.
Have I got this right?
Appreciate your thoughts as always.
5i Research Answer:
In theory, yes. In a downturn the fund will have very limited protection and the put premium will not provide a lot of cushion. Of course, much depends what managers do in such a scenario. We would note that in 2022, which was a pretty bad year for nearly any equity strategy, the fund actually rose 0.2% while markets tanked. While of course past performance is no guarantee, we would consider this a very impressive performance for a fund such as this in that type of market environment (the S&P 500 fell 19.4%). So, theory and reality are at odds here, and we have to give credit to the managers for this.