Gateway Investment Advisers LP/LLC was founded in 1977 in Cincinnati, OH. The firm is historically known for its hedge equity strategies for risk-conscious investors and is one of the longest-running option hedging portfolios. In January 1988, the firm broadened its hedging strategy to its flagship mutual fund, Gateway Fund, thanks to the firm’s outstanding performance in hedging client portfolios during the market crash of October 1987. In February 2008 Gateway Investment Advisers, retaining its name and remaining autonomous, was acquired by behemoth asset managers, Natixis Global Asset Management LP (NGAM).
” With this partnership, Gateway gains access to a broader distribution base and prospects for a higher growth rate than was possible as an independent organization.”, had remarked the then and present, President and CEO of Gateway Investment Advisers: J.Patrick Rogers. And in April this year, NGAM launched Gateway International Fund — a broadly diversified portfolio of 200 to 400 international stocks — through Gateway Investment Advisers LLC, who will also manage this international hedged equity fund. Gateway Investment Advisers LLC, as an autonomously operating affiliate of NGAM, today boasts an AUM of $8.5B, including the $4.5B Gateway Fund.
Gateway Investment Advisers LLC (Gateway) is a leader in hedged equity strategies. The firms utilizes options as a hedge while investing in blue chip S&P 500 stock index. Due to the fact that stock prices fluctuate, this platform provides investors uneasy with short-term risk to take advantage of the growth of potential equities while keeping the risk associated with these equities in check. The financial market has historically grown to be more volatile today and because of that investors seem to have grown warmer to defensive investment strategies or hedging.
Gateway uses hedging techniques in an efficient and consistent way, the firm typically returns 12 percent in a strong market and beats the market in down years, to “reduce portfolio volatility and help protect against financial loss.” The firm sells call options to create regular cash flow and simultaneously buys put options to limit losses in case of a sharp market decline. Although the call options limits Gateway’s upside, the strategy produces long term steady gains with limited risk. Gateway has mastered the art of using this index options-based strategy, so much so that market volatility is regarded by the firm not as an impediment but as an investment tool per se.
Generally, money markets offer low risk with low returns and on the other hand, bond and equity markets offer high returns albeit with higher associated risk. However, comparatively equity markets offer higher returns while bond markets tend to provide lower volatility. And that is where Gateway’s strategy comes in with equities hedged with index options. Gateway’s approach to address risk head first, enables them to use market volatility as a mode of producing returns under a vast array of market conditions. As a result of this strategy, market conditions can be a good diversifier for fixed income investors looking for higher returns without excessive risk the fixed and plays a crucial role in all phases of retirement.
Even though Gateway’s methodology is based on equity, the firm is less reliant on the short-term performance of the stock market compared to its dependence upon the sale of index call options to generate returns. The firm also utilizes a buy-write, or covered call, strategy which involves selling calls against a single stock or a batch of stocks. The short call option offsets the long position, creating a hedge against plunges in the market. Given this, it can limit any upside in the stock portfolio but on the other hand it can generate incremental income, the option’s premium, while hedging risk.
Buy-writes are only one part of a wider category of hedging strategies referred to as “overlays” that employ various derivatives such as options, futures and swaps to mitigate portfolio risk. The overlay market strategy came into prominence after market downturns such as the crashes of 1987, 2000 and 2008, and the subsequent pangs of volatility. However, only a handful of money managers specialize in overlays including Gateway. The overlay strategies are benchmarked against the Chicago Board of Options Exchange’s BMX/VIX index. Studies have concluded that using a BMX strategy may not only match the performance of the S&P index in the long term, but with also only two-thirds of the volatility.
Furthermore, risk is measured by the volatility of investment returns. And since Gateway employs an index option-based strategy, the firm uses its Gateway Index/RA composite to measure its risk adjusted performance. It is an asset-weighted composite of all discretionary accounts under management which have similar investment objectives and hedging strategies. Since the composite was conceived in January 1993, prior to that not all fully discretionary portfolios were represented in the composite.
Even though Gateway nicely falls under the category of long/short funds, Mike Buckius, the portfolio manager of Gateway Funds, is quick to point out that Gateway is unique in that neither he nor his managers are stock pickers, i.e. they are not trying to pick good stocks and short bad ones, generating returns along the way. Mr. Buckius further expounds that Gateway may have the same goals — of rendering a steady return and strong performance with reduced levels of risk — of that of a long/short fund, but that is where the similarity ends because we’re coming at it from a wholly different direction than most long-short funds.”
Gateway uses a wider options markets and market volatility to generate cash flow and lessen risk. The way it works for Gateway, explains Mr. Buckius, is that we buy a portfolio of stocks that tracks the S&P 500 index and rather than speculating on the market, we build a risk management strategy, by using index options, which actively lowers the risk of that portfolio. Part of the cash flow generated is used to buy downside protection in the shape of index put options. “The combination of those three gives us an attractive risk profile and balances risk and return at a sensible level.”
“We’re using broader options markets and market volatility to generate cash flow and reduce risk.”
“We’ve spent decades trying to be experts at this particular niche in the market. As markets have gotten more developed and as investors have gotten more information, they’re able to look at different choices on the risk spectrum, and we’ve been getting a lot more notice. They’re looking for something that’s addressing a particular need in a portfolio that stocks, bonds and cash might not deliver.”
“The stock market is where growth is over the long term; unfortunately, it tends to be a pretty big roller coaster ride to get where you need to be with equity investing.”
“We focus on a lot of different areas, but individual stocks or even the direction of the market isn’t one of them. The bread and butter of our focus are on volatility.”
“There’s always going to be something to worry about.”