OCC, the world's largest equity derivatives clearing organization, today shared the results of a new study, Endowment Risk Management and Return Enhancement with Listed Index and ETF Options, that found that both buy-write and put spread collar overlays improved risk-adjusted performance within the study sample for small, mid-sized and very large endowments, with the small endowment portfolio seeing the largest benefits.
The research study, commissioned by The Options Industry Council (OIC), was conducted by Dr. Edward Szado, Associate Professor of Finance at Providence College School of Business. Dr. Szado researched historical returns for three hypothetical endowment portfolios based on the historical time series of average asset allocations of small (<$25 million), mid-sized ($100-500 million) and very large (>$1 billion) endowments reported in the NACUBO-Commonfund Study of Endowments. To assess the impact of the options-based strategies, the equity allocations of the hypothetical endowments were replaced with Nasdaq QQQ or NDX buy-write or put spread collar strategies.
According to the study, buy-writes on the QQQ and NDX provided meaningful increases in returns relative to the corresponding underlying. The improvements in raw annualized returns averaged 2.4 percent, while standard deviations were reduced by an average of 5.8 percent. The put spread collar implementations provided slightly less return improvements than the buy-writes, while providing larger reductions in standard deviations.
The study concluded that QQQ and NDX buy-write and put spread collar endowment overlays improved risk-adjusted performance for small, mid-sized and very large endowments, with the largest benefits occurring for the small endowment portfolio. While the return improvements were relatively small from an annualized return perspective, these improvements were averaged over a period of 18-plus years, so the cumulative impact was meaningful. Furthermore, the reductions in standard deviations and maximum drawdowns were also economically significant.
"OIC has been at the forefront of educating investors on the benefits and risks of using equity and index options to help manage their financial risk since 1992. We are pleased to support the industry's education and research initiatives, which plays a critical role in driving continued growth within the listed options markets," said Paul Finnegan, OIC Vice President Education. "OIC offers unbiased educational resources for investors and professional money managers seeking to implement derivatives-based strategies within their portfolios. This new study will help increase the level of awareness of the potential value of using listed options by investors."
For in-depth analysis of the results and breakouts by both endowment size and overlay strategy, read the full study on OIC's website.