Ask the Manager: Ron Santella on How Hedged Equity Fits Into a Diversified Portfolio

In this edition of Ask the Manager, we sat down with industry veteran Ron Santella, the founder, CEO, and CIO of Equable Shares, to discuss HEDG — his rules-based hedged equity ETF designed to capture S&P 500 upside while reducing portfolio volatility. With nearly forty years of experience in equity, options, and volatility strategies, Santella shared his perspective on the surging demand for risk-managed solutions, how the ETF wrapper has opened the door to sophisticated strategies, and why he built HEDG as an all-weather approach for advisors and long-term investors.

The hedged equity space is growing rapidly. What do you see as the biggest drivers of investor demand for options-based and risk-managed solutions in today’s markets?​

The growth of the hedged equity space is fueled by multiple factors, including:

There are more tools readily available to educate the retail investor on option pricing and best practices for execution.  This builds confidence to utilize options-based products and has resulted in increased adoption of hedged equity products.

Asset managers and investment firms continue to increase product offerings that cover a wide range of investor needs.

Structures, such as ETFs, offer a cost-effective, liquid way to invest in hedged-equity products. Ease of use is important to attract retail investors.

How has the evolution of ETF structure changed the way investors and advisors access sophisticated strategies like hedged equity, especially compared to traditional mutual funds or separately managed accounts?​

The ETF structure has some inherent advantages such as intra-day liquidity, portfolio transparency and generally, lower costs, which are appealing to investors and advisors.

The growth in actively managed ETFs has broadened the universe of strategies available to investors and advisors.  Investors now have access to equity long-short and hedged equity strategies, which traditionally were likely to be available to more sophisticated investors and institutions.

What is HEDG’s investment strategy?

HEDG’s strategy aims to track the performance of the S&P 500, while reducing volatility and offering a level of protection in declining markets.

HEDG’s portfolio consists of long exposure to the market through the purchase of highly liquid ETFs that track the S&P 500. The option

overlay is a combination of writing 90-day at-the-money call options on the entire long positions and simultaneously, purchasing an out-of-the money put spread on about 30% of the portfolio.

What is HEDG’s Distribution Policy? 

The fund generally makes quarterly distributions.

Tax efficiency is a priority as part of our distribution policy.  We seek to classify most of the distributed income as long-term capital gains or qualified dividends. The latter is derived from our long ETF positions.

How does HEDG fit into an investor’s portfolio?

HEDG was designed for investors who want equity exposure with a significant reduction in volatility. It is an all-weather product that has historically delivered double-digit returns in strong positive markets, while offering a level of protection in declining equity markets.

HEDG is suitable as a complement to a core equity allocation, while also attracting fixed income investors who desire total returns, with reduced volatility.

What sets you apart from your peers?

From our inception in May 2019, HEDG was designed to be investor friendly while meeting its objective of offering a low-volatility approach to the equity markets.

We never use leverage, our covered calls are fully hedged against the underlying ETFs, and we manage the portfolio in a rules-based manner, which eliminates surprises. We strive to de-risk HEDG, where possible.

What was the motivation behind founding Equable Shares and launching your ETF, HEDG?

For the first 25 years of my career, my focus was on delivering alpha for an institutional audience. First, as a founder of a relative value hedge fund, SAM Investments, followed by my tenure as CEO of Fox River Execution, an algorithmic electronic execution firm.

In 2018, I identified a need for advisors and their clients to access a relatable and straightforward solution that provides exposure to the S&P 500, while reducing risk over market cycles.

Seven years after launching Equable Shares, we are proud and humbled that our ETF, HEDG, is listed on the NYSE Arca and is exactly the type of solution that we envisioned creating when we formed Equable years ago.