Overlay Management

Each overlay mandate is tailored to the investor's specific requirements

• The opportunity to participate in positive market developments, as well as to mitigate the effects of negative developments (defending the lower limit)
• The chance to react quickly and flexibly to market risks
• Risk monitoring of individual securities – including outsourced overlay management through an external asset manager (KVG)

• Modularity: separate budgets for different risk types
  • The main risk categories: equity-, interest-rate- and currency-related risks
  • Non- or only partly-manageable risks, including, for example, spread and overnight risks
  • Dynamic risk budgeting by means of tactical signals (Risk Overlay^PLUS)

• Assessment of different asset classes, risk categories and overlay specifications
  • Hedge quality, risk allocation, risk budgeting
  • Regulatory and governmental guidelines

• Management of risk categories either individually or as a whole
• The tailored overlay is underpinned by a customised software solution

A modular overlay approach – hedging only where necessary

• Allows a customised approach through modular concepts
  • Separate management of multiple risk categories from Risk Overlay to Risk Overlay^PLUS

• Consistent risk overlay process tailored to various risk categories
  • Targeted use of derivatives: derivatives hedge risk categories rather than asset classes
  • Reduces the tendency of a pro-cyclical reaction by making anti-cyclical risk budget transfers between individual budgets (Risk Overlay^PLUS)
  • Diversifies where appropriate and hedges risks where necessary
  • Reduces the likelihood of an expensive full hedge

• Increases risk transparency, for example through performance by risk category

Overlay control logic is fine-tuned to tactical signals

• Can be used irrespective of the signal provider
  • Successful cooperation with Vescore by Vontobel Asset Management for more than 10 years
  • Tactical signals play a fundamental, active role

• Fine-tuning in key overlay levers
• Performance harvesting through signal-dependent limits for risk budgets
• Anti-cyclical, tactical re-entry into the market through signal-based budget release
• Intelligent risk budget allocation through tactical signals

There are several reasons for going off track with a portfolio. And there is a tried-and-tested way to stay on track. The following simulations of 2020 and 2021 based on Strategic Asset Allocation (SAA) illustrates what this can look like: 40% global equities, 60% bonds (government bonds) Euroland, USD-EUR hedge, 8% risk budget, hedging via index futures.

• SAA with Risk Overlay^PLUS: optimal hedging of downside risk and timely reentry into the market
• Bonds: minor difference in performance due to hedging in summer
• Equities: benchmark performance was achieved 100%
• Upward and sideways market: no effect on SAA with Risk Overlay^PLUS

• SAA clearly crosses the lower limit of 92% in March 2020
• Risk Overlay^PLUS holds the lower limit: Outperformance through hedging and timely reentry

Please note: opportunity costs may be incurred when using an overlay. There is no guarantee that the lower limit will always be maintained. Past performance is not a benchmark for future performance.

Enabling investments in global equity and fixed income markets while limiting the influence of unintended currency bets on performance is the responsibility of FX Overlay management. Universal Investment positions its currency hedging product in a separate overlay sub portfolio which stands apart owing to its best-execution competitive trading and reduced cash requirements.

In addition, the administrative Master KVG vehicle provides a holistic overview of the entire currency exposure in a master fund, thereby considerably facilitating FX Overlay management.

Manuel Stratmann and Glenn Marci, Senior Portfolio Managers Overlay & Quant Models at Universal Investment-Luxembourg S.A., Frankfurt branch describe the characteristics of our three overlay approaches.

Universal Investment’s portfolio management team presents the different aspects of overlay management.

Good to know.

Thought-provoking interviews and product information on the theme of overlay management.