R32 : What does "overlay" mean ?

CFA Level III
#1

V4, P279, Q11 The Normal Benchmark of the Long-Short is Cash with Russel 1000 “overlay”. P285, in its answer to Q11.E. because the manager “overlays” the long-short portfolio with the Russel futures… Can anyone explain what it means by “overlay” here ?

#2

overlay = futures position You have a long/short portfolio and then you add/reduce beta exposure by overlaying with a futures position.

1 Like
#3

While overlay does mean futures position in this particular case, the concept generally means adding an additional layer on top of something. In this case, the strategy initially had a long-short portfolio. The return would equal the return of this portfolio. The manager then lays another layer on top of this portfolio i.e. futures. This means that the total return would not equal the return on this portfolio + the futures.

#4

Zain Zafar Wrote: ------------------------------------------------------- > While overlay does mean futures position in this > particular case, the concept generally means > adding an additional layer on top of something. In > this case, the strategy initially had a long-short > portfolio. The return would equal the return of > this portfolio. The manager then lays another > layer on top of this portfolio i.e. futures. This > means that the total return would not equal the > return on this portfolio + the futures. that is a very good description!

#5

CFAI also uses overlay in the connection of currency risk management of a global portfolio, if I remember it correctly. So you have the portfolio manager worrying only about return in local currencies (beating benchmark in local currency), then you have a separate OVERLAY group of currency risk management worrying total global currency risk exposure and hedge/take currency risk as appropriate to enhance the return in USD.

#6

Zain Zafar Wrote: ------------------------------------------------------- > This means that the total return would not equal the return on this portfolio + the futures. Can you explain why the total return would “not” equal the return on this portfolio + the futures ? Thanks !

#7

Ok that was probably a typo. My last sentence should’ve been: This means that the total return would equal the return on this portfolio + the futures.