Case for Low-Volatility Equity

An Index-Option Based Approach

The challenge of pursuing returns while managing risk is increasingly difficult. In an environment where the equity market is defined by the potential for significant volatility and the fixed income market is defined by low interest rates with the potential to rise, many types of investors - from individuals to large institutions - are seeking new ways to achieve the right balance between return and risk.

Over long time periods, diversified equity portfolios have historically generated attractive returns that outpace inflation. But when equity prices fluctuate significantly, short-term risks create challenges for long-term investors. Increased volatility tempts individual investors to abandon sound long-term strategies, and poses unique challenges for institutional investors with long-term liabilities.

At Gateway, we believe low-volatility equity strategies that reduce risk with index options can be an effective solution to the challenges investors face. Broadly diversified equity portfolios in combination with index options and their associated volatility premium can reduce downside risk while simultaneously allowing for equity exposure.

Our strategic use of index options can convert equity market volatility into cash flow while maintaining equity market correlation. This consistent risk profile has the potential for less downside exposure and smaller short-term fluctuations than the underlying equity index. These characteristics may be useful to investors seeking new solutions to the ever-more challenging investment objective of adding short-term consistency to the pursuit of long-term portfolio returns.