GBU Swan Quarterly Update, Q3 2013

The Good, the Bad, and the Ugly

Quarterly Update of the Swan Defined Risk Strategy

THE GOOD

The S&P 500 composite index, including dividends, has returned 19.81% so far in 2013 through the end of the third quarter, September 30, 2013. The Swan Defined Risk Strategy (“Swan DRS”) select composite has returned approximately 8.36% year to date as of September 30, 2013, net of fees, and 9.12% annualized since inception on July 1, 1997. We have included the gross (fees not deducted) performance (see Composite Return by Point of Entry on page 2) to show the variation of the performance within the composite. This is intended to not only give investors a better gauge of how their accounts did relative to the composite but also show the upside capture ratio of each account based upon when the investment was made in the Swan DRS. For example, as of January 1, 2013 investors have earned 9.77% gross return versus our composite gross return of 9.18% for all accounts. This also means that each additional percentage gain from the September 30, 2013 levels should result in a higher upside capture ratio than investors who invested later during the year (e.g. on July 31, 2013).

As we have discussed before, once the market has gained more than 20%, the Swan DRS should have higher upside capture ratios, since the value of the put options used to protect the portfolio has declined significantly. In other words, if the market gains 5% (from 20% to 25%) the Swan DRS should see a corresponding gain of between 4-4.5%, assuming a January 1, 2013 investment.
I may begin to sound like a broken record in discussing the implausibility of the current levels of the stock market; suffice it to say that we will gladly take what the market gives us and we will be relieved when the Basket I renewal of the hedge is complete, thus “locking in” a significant portion of our gains by rejuvenating the protection on our accumulated capital. As you have learned from a separate communication from the firm, we are considering the pros and cons of re-hedging now as opposed to waiting until the usual re-hedge in late December (the normal time of re-hedging).