Overlay

What Is Overlay?

Overlay alludes to a management style that fits an investor's separately managed accounts. Overlay management utilizes software to follow an investor's combined position from separate accounts. The overlay system examines any portfolio adjustments to guarantee the overall portfolio stays in balance and to keep any inefficient transactions from happening. Overlay portfolio management ensures the investor's strategies are executed and facilitated effectively.

Overlay portfolio management is frequently utilized with the portfolios of institutional investors and super high net worth individuals. Money managers and financial advisors utilize it to regulate and follow the different investor accounts in their care.

How Overlay Works

At the point when an investor has separately managed portfolios, assets are put heavily influenced by various managers. This set-up can cause failures assuming the managers start making transactions that either increase the risk of the overall portfolio, have negative tax effects, unbalance the investor's positions, or work at cross purposes. For instance, in the event that one of the separately managed account traders purchases an asset, and one more trader sells it, the investor is left with a neutral position and two transaction fees.

Overlay management looks to work on the communication between the separate managers, considering increases in transaction effectiveness. In traditional separately managed account structures, clients' capital is designated to numerous outside managers to invest, yet all at once in an

overlay system, the assets — and the ultimate responsibility — remain together

in a unified managed account. Overlay portfolios ought to have a stated purpose and specific rules to keep away from issues emerging. For example, the overlay manager might decide greatest allocations across a whole portfolio or expect that investments are made in a specific asset class.

As a leaflet from Ostrum (formerly Natixis) Asset Management charmingly puts it;

Here and there, the job of the overlay manager is practically equivalent to that of a symphony director. The overlay manager (guide) facilitates the activities of the underlying managers (performers) to guarantee an agreeable outcome.

Benefits of Overlay Portfolio Management

• Rebalancing: An overlay manager guarantees an investor's total holdings are rebalanced when fundamental. For instance, an investor might need a portfolio allocation of 30% equities, 30% fixed income and 20% cash. Assuming these asset classes are held in three distinct accounts, the overlay manager makes adjustments to keep up with these allocations.
• Risk Management: Risk can be managed all the more effectively utilizing an overlay manager. Portfolios that hold different asset classes, investment types and hedging strategies can be monitored to ensure the portfolio is staying inside the investor's risk boundaries. For instance, in the event that an investor is utilizing a long/short investment strategy through various trading accounts, an overlay manager can monitor the overall net exposure.
• Tax Management: Overlay managers can monitor capital gains and losses across an investor's separate accounts to assist with dealing with their tax obligations. For example, an overlay manager might choose to sell a losing investment in one account to offset a large capital gain in another account to some extent.
• Simplicity: Overlay portfolio management makes a complex multi-investment strategy simple to carry out. Accounts can be consolidated into a single master portfolio, with a single statement, to limit desk work and client compliance agreements. On the off chance that the investor has a question about a portfolio, they have a single point of contact.

Assuming the various portfolios have complex investment strategies, an overlay system might be tedious to set up. Gathering documentation from different fund managers and understanding their approach toward portfolio construction and risk management might require various gatherings to guarantee effective coordination — initially, yet continuous.

Additionally, an overlay portfolio commonly should be approved by different compliance offices before it tends to be laid out.

True Example of Overlay

Numerous riches/asset management firms and trust companies offer overlay services to their clients. Flute player Jaffray is one such. Clients who opt for a Unified Managed Account are assigned an overlay portfolio manager, who has responsibility for the everyday management of the assets, in light of the client's stated objectives, needs, inclinations, risk tolerance, and so on. This manager, thusly, gets investment counsel from other investment managers as a model portfolio — a recommendation of specific securities and transactions. The overlay portfolio manager chooses whether or not to execute these recommendations, and how much, in accordance with the client's tax situation, current asset allocation, and degree of forcefulness.

Features

• Overlay alludes to an asset management style that utilizes software to orchestrate an investor's separately managed accounts.
• The overlay system examines any portfolio adjustments to guarantee the overall portfolio stays in balance, forestalling failures and planning efforts in accordance with a client's tax situation and risk tolerance.
• Overlay frequently includes the assets being combined in a unified management portfolio, directed by a manager, to whom individual asset managers make recommendations.