Tax Management: Overlay managers can monitor capital gains and losses across an investor’s separate accounts to help manage their tax obligations.For example, if an investor is employing a long/short investment strategy through different trading accounts, an overlay manager can monitor the overall net exposure. Portfolios that hold different asset classes, investment types and hedging strategies can be monitored to make sure the portfolio is remaining within the investor’s risk parameters. Risk Management: Risk can be managed more effectively using an overlay manager.If these asset classes are held in three different accounts, the overlay manager makes adjustments to maintain these allocations. For example, an investor may want a portfolio allocation of 30% equities, 30% fixed income and 20% cash. Rebalancing: An overlay manager ensures an investor’s total holdings are rebalanced when necessary.For example, if one of the separately managed account traders purchases an asset, and another trader sells it, the investor is left with a neutral position and two transaction fees.Īdvantages of Overlay Portfolio Management This set-up can cause inefficiencies if the managers begin making transactions that either increase the risk of the overall portfolio, have negative tax effects, unbalance the investor's positions, or work at cross purposes.
When an investor has separately managed portfolios, assets are placed under the control of different managers.
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