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Your Money: A hedged equity index strategy does stocks picks for you

If you don't pick stocks, or don't want to pick stocks, then a hedged equity index strategy might be the ticket for you.

If you don't pick stocks, or don't want to pick stocks, then a hedged equity index strategy might be the ticket for you.

Many investors want to put money to work in "the market," and we can do it very simply: buy an index fund, either based on the Standard & Poor's 500 benchmark, or the Dow, the Russell, or some other basket of equities. That reduces the risk of picking just a few stocks, and ideally you earn no more and no less than the market - before fees, of course.

Local money manager Thomas McKeon, an options trader on the Philadelphia Stock Exchange floor from 1980 to 1991, says his investment idea goes one step further. And in an age in which the stock market is returning less than stellar numbers, and the bond market and interest-rate returns are abysmally low, his pitch is worth hearing.

McKeon and his partner, Timothy Ringler, started Clothier Springs Capital Management in 2010 because they kept watching their friends and clients struggle to meet their returns every year.

"We think we've crafted a simple rules-based strategy that compensates you to wake up every day," McKeon said. His strategy is known as a buy-write.

Clothier Springs Capital buys indexes in the form of an exchange-traded fund. Then it uses options to collect a tiny bit each month regardless of where the market moves. (You can read more about options and how they work at the Options Industry Council's website,

For example, its CSCM Large Cap Buy-Write is a strategy that combines two ideas: buying a Standard & Poor's 500 Index (symbol: SPY) and then selling a one-month, at-the-money call option on that very same underlying index. When it sells the option, it collects a little bit of money, or premium, and that adds to the overall return.

Then each month it "rolls," or renews, the one-month option just before expiration. The index and the option hedge are maintained at all times, regardless of what the stock market is doing or the level of volatility. The S&P 500 is the benchmark for this strategy. It is a market-capitalization weighted index of the 500 largest U.S. companies. The purpose of hedging is to outperform the benchmark on both a return and risk basis over the market cycle.

"The short and sweet description of our investment - passive hedged equity - can cause cognitive dissonance," McKeon said in an interview at his Phoenixville offices. "When investors hear the word passive, they generally think of a portfolio designed to mirror an index as closely as possible. That's certainly what we think of."

Then it adds an options-based hedge to other market indexes we know and love, like the S&P 400 and the Russell 2000. In another example, Clothier Springs buys the S&P 400 Mid-Cap Index and then sells a call option on the same index.

If you buy a call, you have the right to buy the underlying instrument at a price on or before the expiration date. The situation is different if you write, or "sell," a call option. Selling an option position obligates you, the writer, to fulfill your side of the contract if the holder wishes to exercise. When you sell a call as a transaction, you're obligated to sell the underlying instrument at the strike price - the fixed price at which the owner of an option can purchase (in the case of a call), or sell (in the case of a put), the underlying security or commodity.

Both of those portfolio components are liquid, transparent, low-cost, and well-known. "No black-boxes, no secret formulas and no mumbo-jumbo," McKeon said. "It's so simple, sometimes we have to assure people there's not more to it."

McKeon and Ringler also closely watch the volatility barometer of the stock market, an index known as the VIX, which has been surprisingly low lately. "We don't know why it's low, but something will spook the market eventually," McKeon said. "It always does."