When regional equity markets have differing returns, investors may find their asset allocations deviating from those stated in their investment policies. A recent example was the rally in U.S. equity compared to non-U.S. equity, where many clients found their portfolios overweight U.S. and underweight non-U.S. relative to their targets. To maintain desired asset class exposures, many clients employ the services of an Overlay manager that utilizes futures contracts. In a trending market, the futures positions can become large. Using an Exchange-for-Physicals (EFP) strategy can be a very cost-effective solution for simultaneously unwinding a large futures position while narrowing the deviation in physical exposures.
This Strategy Spotlight explores how investors can use EFPs to cost-effectively rebalance between U.S. and non-U.S. equities.