Envestnet, a leading provider of integrated technology, data intelligence and wealth solutions—and also one of the largest direct index separately managed account providers—has launched an Options Strategy Quantitative Portfolio (QP) to address the market volatility, tax risk, and liquidity risk associated with concentrated stock positions, and to help advisors and their clients unwind these positions.
"Envestnet is focused on delivering solutions that can be customized to address any number of requirements within an investor's portfolio," said Dana D'Auria, Co-Chief Investment Officer and Group President of Envestnet Solutions. "This new Options QP strategy, which will allow advisors to build better portfolios around low-cost basis shares and other investment needs, is a great addition to our suite of personalized solutions."
Investors may find themselves with concentrated stock positions for a number of reasons, such as an inheritance, a large stock position granted by a company, shares from a business sale, or simply loyalty to a long-term holding. This can expose them to loss if the company underperforms and its stock drops. For investors holding a concentrated position in less liquid or closely held stocks, sometimes selling the position without moving the market or finding buyers can be difficult when trying to exit the position. Furthermore, selling a concentrated position in a stock that has seen strong appreciation may trigger significant taxes. Consequently, many investors will delay or avoid selling to defer taxes leading to a prolonged concentrated position, further exacerbating the risk.
Developed by Envestnet's quantitative asset management unit, QRG Capital Management, Inc. (QRG), the new strategy offers investors three options-based hedging solutions that can help generate income from and/or mitigate the risk of a concentrated position while spreading out taxable gains over a multi-year time span. More information about the Options Strategy QP is available at https://www.envestnet.com/qrg/strategies/options.
"In keeping with Envestnet's ongoing commitment to innovation and addressing investor needs, we have created a broad, scalable solution which can be customized to help individual investors optimize the income from concentrated stock positions," said Brandon Thomas, Co-Founder and Co-Chief Investment Officer of Envestnet. "The Options Strategy QP is underpinned by the robust, quantitative methodology and dedicated support the industry has come to expect from us—and is designed to help advisors and their clients take advantage of options-based strategies on their terms, in ways that they are most comfortable pursuing."
A Customizable Options Strategy
Options are derivative securities where a buyer agrees to pay a premium to the seller for the right to buy or sell the securities at a specific price within a certain timeframe. The seller then collects a premium for granting the buyer the right to sell the security for them.
Financial advisors that utilize the Options Strategy QP can fill out a personalized digital survey, built into the Envestnet platform, which asks questions designed to help them understand and feel comfortable with this type of complex strategy. The information provided by clients in the questionnaire can help them work together with their advisors to identify the best approach within the Options Strategy QP:
- Covered Calls—Call options enable the buyer of the option to buy the underlying asset at the strike price of the option by the expiration date, and require the seller of the option to sell that underlying asset. Covered calls entail selling call options to cover an investor's shares of the existing stock position, in order to generate more income and mitigate downside risk.
- Protective Puts—Put options allow the option buyer to sell the underlying asset at the option's strike price by the expiration date, and require the option seller to buy the underlying asset. A protective put strategy involves two positions—the long-put option and shares of the underlying stock. The profit from the put option can directly offset the decline of the stock price below the strike price when the option expires.
Crucially, the Options Strategy QP's protective put approach can be customized by investors and their advisors by desired downside protection, number of shares to hedge, and the projection's time horizon.
- Collar Strategies—These approaches, which involve buying a put and selling a call on the shares of the underlying stock, are designed to deliver downside protection at a lower cost by financing the purchase of put options with income generated from call options. The QRG collar strategy within the Options Strategy QP adheres to the client's desired risk tolerance while generating income in a customizable way.
"Our rules-based process is key to helping high-net-worth investors potentially increase returns from concentrated stock holdings through strategic liquidation, while reducing risk and offsetting taxable gains," said Hunter Willis, CFA, Portfolio Manager for Envestnet's Quantitative Research Group. "We don't just accept the outcome of a position—we look to optimize returns by utilizing stock-specific inputs designed to capture the volatility risk premium in each stock option."
The QRG suite of QPs is designed to combine the benefits of beta investing with the portfolio customization of managed accounts. Envestnet offers Market Series, Factor-Enhanced, Sustainable, and Fixed Income QPs to help investors strengthen after-tax and risk-adjusted outcomes in a cost-effective manner. Envestnet's suite of QPs has generated annual growth of 40 percent in accounts and advisors over the past three years. First introduced in 2013, the QRG QP offering consisted of more than $12 billion in assets under management or administration as of the second quarter of 2024.
