Overlay Speak

Abstract

A perception of high risk and intimidating technical terms may have kept some investors from considering derivatives programs such as overlays. This practical guide may mitigate such barriers to entry. Contrary to common perceptions, a risk-controlled use of derivatives is often quite non-threatening. Exposure can be quantified to translate all derivatives contracts into an equivalent investment in cash, bonds, and stocks. Numerical examples help the investor interpret overlay programs, absolute return strategies, and alpha transportation. The article concludes with a practical list of the key elements to consider in structuring an overlay program.