Overlay managers (“OM”) are engaged to provide a variety of derivatives-based investment strategies. Overlays are implemented through purchasing futures or other derivative instruments so that the net characteristics of the underlying assets and the overlays deliver the desired level of risk mitigation and optimization. When an overlay is added to an investment portfolio, the overlay may effectively represent the addition of economic leverage and, in most cases, the total notional portfolio market value will be larger than the underlying portfolio.
Over the past decade there has been a proliferation of overlay products, and overlay managers are increasingly adept at crafting custom overlay strategies to meet client needs. Our research note offers a brief overview of some of the most common overlay strategies, their benefits, and considerations.