Options-based “synthetic annuities” give investors the ability to generate higher returns, provide better downside protection, and utilize risk more efficiently than pure stock and bond-based portfolios. Now, this strategy’s creator shows exactly how to use them to support a wide range of trading and investing goals. Hedge fund manager Michael Lovelady shows how synthetic annuities blend the best features of traditional portfolios with the risk management discipline of quantitative investing, increasing current yields while also reducing volatility. Michael presents this new strategy with unique graphics and simplified models that any investor or trader can use, and demonstrates its value in the context of today’s key market trends. He illuminates the entire “ecosystem” of theories, products, and tools surrounding synthetic annuities, and shows exactly how to integrate them with other investment and portfolio management techniques.
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About the Author
Michael Lovelady, CFA, ASA, EA, is the investment strategist and portfolio manager for Oceans 4 Capital Group LLC. Michael designs and implements reduced-volatility and theta-generating hedge fund investment strategies. He developed the “synthetic annuity” (SynA) and uses it extensively in portfolio management.
Prior to founding Oceans 4, Michael worked as a consulting actuary for Towers Watson and PricewaterhouseCoopers. Much of his work was related to design issues at a time when many employers were moving away from traditional defined benefit plans. Michael worked with clients to consider and implement alternatives ranging from defined contribution to hybrid DB/DC plans. His experience with retirement income strategies, from both the liability and asset sides, has given him a unique perspective.
Michael has also been involved in teaching and creating new methods for making quantitative investing more accessible to students, trustees, and others without math or finance backgrounds. He developed the investment profile--a graphical representation of investments and the basis of a simplified option pricing model, and visually intuitive presentations of structured securities.
Michael has served various organizations, including Hughes Aircraft, Boeing, Global Santa Fe, Dresser Industries, the Screen Actors Guild, The Walt Disney Company, Hilton Hotels, CSC, and the Depository Trust Company. He is a CFA charterholder, an Associate of the Society of Actuaries, and an ERISA Enrolled Actuary. He currently lives in Los Angeles.
Table of ContentsPreface viii
Chapter 1 Introduction 1
Chapter 2 Synthetic Annuity Design 25
Chapter 3 Tracking Performance 53
Chapter 4 Covered Synthetic Annuities 69
Chapter 5 Managing a Covered Synthetic Annuity 99
Chapter 6 Generalized Synthetic Annuities 127
Chapter 7 Managing a Generalized SynA 151
Chapter 8 Synthetic Annuities for High-Yielding Stocks 169
Chapter 9 Synthetic Annuities for the Bond Market 183
Chapter 10 Synthetic Annuities for the Volatility Market 207