COLLX, the Collar Fund

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I previously discussed the idea of hiring a fund manager who runs a non-traditional mutual fund.  Specifically the post was about a covered call writing fund.

Today I'm posting about a fund that invests in collars.  This is a conservative strategy whose main purpose – in my opinion – is to protect the value of your assets.  The goal is to earn profits, but minimizing losses is the top priority.

"The Collar Fund (symbol: COLLX) is an open-ended, no load fund whose management fees are less than 1% per year.

Quoting directly from promotional material, their "investment services may suit a broad spectrum of investors: Retirees, baby boomers, or nervous investors who are willing to forgo some possible upside return in exchange for protection."

If you are interested in collars, and willing to pay a small management fee, take a look at what they offer.  [Disclosure: I receive nothing for mentioning this fund]

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Jefferies Group, a major global securities and investment banking group, recently (Jan 2010) published a report that compared how well various hedging strategies did their job – i.e., how well they protected a diversified stock portfolio. 

Among a variety of collars and put spreads (example buy a put that's 5% OTM and sell another that's 10% OTM), the 95/105* collar provided the best hedge in 2009.  Runner-up was the 90/110* collar.  These results are similar to those observed in earlier years.

*The 'numbers' that define a collar describe how far OTM  are the options that comprise the collar. 

A 95/105 collar owns  the 95 put – or the put whose strike price is 95% of the index price (in other words, is 5% out of the money) – and sells the 105 call (the call whose strike price is 105% of the value of the index (in other words, 5% OTM).

The report recommends (for 2010):

  • using collars or put spreads to hedge a portfolio
  • not buying put options because they are less effective as a hedge
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6 Responses to COLLX, the Collar Fund

  1. Burt 02/10/2010 at 9:49 AM #

    Mark, What do they mean by put options are less effective as a hedge? Less effective relative to put spreads and collars? How are they measuring efficacy? By cost of protection? Is there some timing or volatility assumption they are making? Also, doesn’t the fact that volatility declined over 2009 affect how put options performed? A lot of questions I know. Please don’t feel compelled to post a lenghty reply. Any clarity would be helpful. Thanks.

  2. Mark Wolfinger 02/10/2010 at 9:58 AM #

    Burt,
    This is ‘after the fact’ performance related data. And I’m told by Jefferies that this data is similar to past years (no idea how many years).
    The point is that the two collars provided higher risk-adjusted returns. I’m not into the statistical mathematics, but best ‘risk-adjusted return’ is the holy grail for investors.
    It’s a combination of best return for the lowest risk. It’s not necessarily the ‘highest return.’
    In a rising market, the unhedged portfolio performs best, but it also has the highest risk.
    Bottom line: Buying puts provided a less profitable year than buying collars – and that takes risk into consideration. they believe this year’s outcome will provide similar results and recommend the collar to the married put.

  3. Bill 02/10/2010 at 9:17 PM #

    I have a question about an option that I really don’t understand. I own stock in Enterprise Products Partners (EPD) so I looked up their calls to see if there would be a good premium available for selling a covered call. In my brokerage account I found that the April 35 call has a bid/ask of $3 / $3.80. This seems to good to be true and I noticed under the strike is (AJ1) this appears to be an adjusted strike price but I’m not sure what this really means. I looked at my virtual trading account at CBOE.com and I cannot get any options quoted in April for EPD.
    Can you explain?
    Bill

  4. Mark Wolfinger 02/10/2010 at 9:40 PM #

    An adjusted option requires delivery of something OTHER THAN 100 shares. That’s what non-standard means.
    Details Friday

  5. Burt 02/15/2010 at 2:32 PM #

    Thanks for the clarification!

  6. Drew 02/26/2010 at 11:05 AM #

    Mark, I am inviting you to visit our website http://www.swanconsultinginc.com
    We have been using options to protect and grow individual clients’ portfolios since mid-1997. Real numbers, not models or studies, that demonstrate the value in conservative hedging techniques.