Structured equity investments refer to equity investment strategies that follow rules-based methodologies to construct portfolios. They have become increasingly popular among investors looking to systematize their stock picking process. This article provides an overview of major structured equity investment strategies employed by asset managers and hedge funds.
Quantitative/algorithmic equity strategies screen stocks based on factors
Many structured equity funds employ quantitative, rules-based models that screen the stock market based on various factors like valuation, momentum, quality, volatility etc. For example, a momentum strategy would rank stocks by trailing total returns over 6-12 months and go long top decile while shorting bottom decile. These algorithmic strategies remove human emotion and rely on backtested rules.
Long/short equity funds take both long and short positions
A common structured equity strategy is market-neutral long/short. The fund manager identifies stocks expected to outperform and buys them (long positions), while simultaneously short selling stocks expected to underperform. This makes the fund neutral to overall market exposure. The goal is to isolate and capture the spread return between the longs and shorts.
Option overlay strategies generate extra income/protection
Some structured equity funds use options to overlay systematic strategies. For example, equity collars involve holding a long stock position while simultaneously buying puts and selling calls against that position. This generates extra income but caps the upside. Alternatively, married puts allow upside while the long puts provide downside protection.
Equity market-neutral funds remove systematic market risk
Market-neutral equity funds use short positions and derivatives to create zero exposure to systematic market risk factors like small-cap, value, and momentum. This aims to isolate manager alpha. An equity market-neutral strategy would have beta very close to zero and the fund would be unaffected by market downturns.
130/30 funds apply leverage to enhance returns
130/30 strategies take 130% long exposure and 30% short exposure, using leverage to amplify returns beyond a traditional long-only fund. For example, a $100 million 130/30 fund would buy $130 million of stocks expected to outperform and simultaneously short sell $30 million stocks expected to underperform.
In summary, structured equity investment strategies employ rules-based, systematic methodologies rather than pure stock picking. Major strategies include quantitative algorithmic strategies, market-neutral long/short, options overlay strategies, equity market-neutral funds, and 130/30 leveraged long/short funds.