Strategic Overlay is an investment management technique involving the application of a distinct, often algorithmically driven, strategy to an existing portfolio of assets. Its purpose is to modify the portfolio’s overall risk-return characteristics or achieve specific investment objectives without altering the underlying asset allocation directly.
Mechanism
This technique typically functions by employing liquid derivative instruments, such as futures or options, to adjust the portfolio’s exposure to various market factors like volatility, interest rates, or currency fluctuations. The overlay strategy operates as a separate layer, executing trades independently of the core asset managers but designed to interact with the portfolio’s aggregate risk profile.
Methodology
In crypto investing, a strategic overlay might involve using perpetual futures to manage the directional beta of a digital asset portfolio, or employing options strategies to hedge against downside risk or capture additional yield. This methodology separates the generation of alpha or the management of specific risks from the fundamental asset selection process, allowing specialized expertise to optimize portfolio performance and manage systemic exposures more precisely.
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