JPMorgan Hedged Equity offers investors a transparent, well-defined strategy that will help them remain invested during challenging markets. Its experienced team and reasonable fees earn the strategy a Morningstar Analyst Rating of Silver for its cheapest share classes, while more-expensive share classes are rated Bronze and Neutral.
The strategy aims to provide smoother equity returns by tempering downside and upside returns via a systematically implemented options strategy. At the start of every quarter, the team purchases put options 5% below the S&P 500’s value. To offset the cost of the put option, the team first sells put options 20% out of the money. This structure should generally protect the fund from quarterly losses in the 5%-20% range; if markets fall less than 5%, the fund should fall in line with the market, and if the market falls more than 20%, the fund should incur the same incremental losses beyond negative 5%. The team also sells further call options to generate enough option premium income to cover the remaining cost of the hedges. As designed, the options overlay tempers upside returns in exchange for downside protection, limiting drawdowns to 6.8% for 2022 through August and 4.9% during the first quarter of 2020. Still, returns on the Institutional share class have been robust. Five-year returns through August 2022 sat at just over 7.2% compared with the S&P 500’s 11.8% return. The strategy has shown positive alpha to our category index over all rolling three-year periods bar one since inception, highlighting its ability to add value to a diversified portfolio.
Hamilton Reiner runs the show here. The lead manager and architect of the strategy joined JPMorgan in 2009 and has more than three decades of equity and options trading experience. He is supported by comanager Raffaele Zingone and 24 JPMorgan equity analysts who implement the low-tracking-error equity portfolio the options are built around.
JPMorgan soft-closed the strategy earlier in 2021, a welcome move designed to preserve the smooth operation of the quarterly options reshuffle. The newer Class 2 and 3 versions have picked up some of the slack as investors increasingly diversify across all three implementations of the strategy. The only difference being the month end when then options are executed. While this is still a large fund, given its index aware equity portfolio and index options overlay, capacity is not currently a concern.