Jumping the Gates: Using Beta-Overlay Strategies to Hedge Liquidity Constraints

Drs. Andrew Lo and Alexander Healy propose a futures overlay strategy designed to hedge out or control the common factor exposures of gated assets. The study demonstrates that by taking countervailing positions in stock, bond, currency, and commodity exposures, an investor can greatly reduce the systematic risks of their gated assets while still enjoying the benefits of manager-specific alpha. The researchers propose that such overlay strategies can also be used to reposition the betas of an investor’s entire portfolio, effectively rebalancing asset-class exposures without having to trade the less liquid underlying assets during periods of market dislocation.

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