Expanding the Efficient Frontier by Capturing the Risk Premium

AUTHORED BY: Sean E. Heron, CFA Portfolio Manager SUMMARY

Risk management strategies continue to grow in complexity and opacity. Yet a straightforward putwrite strategy can be a simple and efficient way of delivering a unique source of return known as the Volatility Risk Premium (VRP). VRP is compensation to an investor for providing insurance against sudden spikes in market volatility, which tend to coincide with market declines. This risk premium is believed to arise from the behavioral bias known as risk or loss aversion, which suggests that investors are willing to sacrifice a small, but certain amount of return to remove the risk of a larger uncertain loss. We believe strategies that use options, futures or swaps to capture the VRP can generate returns with low correlation to traditional assets and expand the benefits of diversification. This paper illustrates how a putwrite strategy might be used effectively to harvest the VRP and improve risk-adjusted returns of a diversified portfolio.

KEY The VRP is a unique source of return TAKEAWAYS The VRP has been persistent with a high frequency of positive returns

The VRP is observable across a number of different asset classes and geographies

The VRP can be harvested through multiple structures

The VRP can enhance portfolio construction through diversification

01 THE VRP: A UNIQUE AND ENDURING SOURCE OF RETURN Calculating the VRP

The VRP is the difference between the market’s expected Strategies to capture the VRP provide a unique source volatility that is implied by prices and the actual of return that tends to be missing from most traditional volatility realized as underlying asset prices change. asset allocation approaches. VRP capture essentially involves selling financial “insurance” to investors looking VRP = – Subsequent Realized Volatility to buy downside protection. Similar to other forms of insurance, it tends to trade at a premium above the Implied volatility is the estimate of the underlying asset’s market’s expected future volatility – hence the name future volatility derived from option prices. It can be “volatility risk premium.” This premium is rational both calculated through the use of an iterative algorithm that for the buyer and the seller, as the buyer pays to remove solves a Black-Scholes equation. In addition to the market uncertainty and the seller requires compensation for price of an option, the model requires the following inputs: downside exposure. current underlying asset price, , date, risk-free rate, and interim cash flows. Most investors The VRP has been an enduring phenomenon. As shown agree that solving for the implied volatility of one option is in Exhibit 1, the VRP of the S&P 500 has generated a fairly straightforward. However the implied volatility of an positive return 86.0 percent of the time, with an average index is complicated. annual rate of return of 4.1 percent from January 1990 through October 2018.1 For example, the implied volatility of the S&P 500, as measured by the CBOE S&P 500 Volatility Index (VIX) is Exhibit 1: VRP of the S&P 500 Positive Frequency: 86.0% VRP Over 27 Years based on interpolating the 30-day point of the volatility EXHIBIT 1: VRP OverAnnual Average: 27+ 4.1%Years 90% curve for the S&P 500 and calculating a weighted average VRP of the S&P 500 of all implied volatilities from a series of S&P 500 Index 80% Positive Frequency: 86.0% 70% Annual Average: 4.1% options. Implied Volatility 60% Realized Volatility 50% Unfortunately, weighted averages can be misleading, as

40% there is more than one way to arrive at the same answer.

30% For example, the VIX Index could equal 16 if each of the

20% individual S&P 500 Index options have the same implied 10% volatility of 16. However, the index could also equal 16 0% when the at-the-money volatility is at 12, especially if 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 elevated skew (downside volatility) or kurtosis (fat tails) Sources: Glenmede Investment Management LP, FactSet Data through 10/31/2018 are present. The S&P 500 Index option prices reflect The persistence of the VRP is also evident in shorter the market’s attempt to estimate the probabilities of the time frames, as seen in Exhibit 2.1. From the beginning future return distribution of the S&P 500. The VIX Index is of 2008 through October 2018, the S&P 500’s VRP had a not tradeable, and so investors must use futures, swaps positive return 83.2 percent of the time with an average or options to gain exposure to the VRP. annual rate of return of 3.5 percent. Although these numbers are slightly lower than the long-term averages, While implied volatility is the market’s measure of future the inclusion of performance through the financial expected volatility, realized volatility is the market’s crisis demonstrates the endurance of the VRP despite measure of actual volatility. In the above example, realized extreme market conditions. volatility would be measured using the annualized standard deviation of the S&P 500 Index’s daily returns. The difference between these two types of volatility results in the VRP.

1 Glenmede Investment Management Proprietary Research, 2018. VRP = Vix Index – Realized Volatility of the S&P 500. 02 VRP of the S&P 500 Exhibit 2.1: EXHIBIT 2.3: EXHIBIT 2.1: VRPPositive of theFrequency: S&P 500 84.1% Exhibit 2.3: VRP of the iShares MSCI EAFE ETF Positive Frequency: 79.5% 90% Positive Frequency: 83.2% Annual Average: 3.5% 120% Annual Average: 2.8% 80% 70% 100% 60% Implied Volatility Realized Volatility 80% 50% Implied Volatility 40% 60% Realized Volatility

30% 40% 20% 10% 20% 0% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Sources: Glenmede Investment Management LP, Bloomberg Data through 10/31/2018 Sources: Glenmede Investment Management LP, Bloomberg Data through 10/31/2018

SIMILAR RESULTS CAN BE OBSERVED EXHIBIT 2.4: VRPVRP of theof iShares the MSCI iShares Emerging Markets MSCI ETF Emerging Markets ETF Exhibit 2.4: Positive Frequency: 82.7% ACROSS A NUMBER OF DIFFERENT PositiveAnnual Average: Frequency: 4.1% 82.7% 70% Annual Average: 4.1% ASSET CLASSES AND GEOGRAPHIES. 60%

50% Implied Volatility The VRP is also observable in global equities and Realized Volatility 40% U.S. Treasuries. Exhibits 2.2-2.5 show the VRP across 30% different broad-based ETFs from the beginning of 2008 20% through October 2018.2 Small-cap U.S. and emerging 10% market equities showed an average annualized VRP 0% return of 3.7 percent and 4.1 percent, respectively, with 2011 2012 2013 2014 2015 2016 2017 2018 roughly the same positive frequency as their domestic large cap counterpart. Developed equities (MSCI EAFE) Sources: Glenmede Investment Management LP, Bloomberg Data through 10/31/2018 captured VRP at a slightly lower frequency of 79.5 percent with an annualized return of 2.8 percent. Even long-term U.S. Treasuries exhibited a positive VRP, albeit EXHIBITExhibit 2.5: VRP of the iShares 20+ Year Treasury Bond ETF Positive Frequency: 72.7% lower at 1.3 percent annualized with a lower frequency 40% Annual Average: 1.3% of 72.7 percent. 35% 30% Implied Volatility Realized Volatility 25% 20% EXHIBIT 2.2: VRP of the Russell 2000 Exhibit 2.2: Positive Frequency: 83.4% 15% 100% Annual Average: 3.7% 10% 5% 80% 0% Implied Volatility 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 60% Realized Volatility Sources: Glenmede Investment Management LP, Bloomberg Data through 10/31/2018 40%

20% 2 Implied Volatility is represented by the following CBOE Volatility Indices: 0% Exhibit 2.1 - S&P 500 Volatility Index (VIX), Exhibit 2.2 - Russell 2000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Volatility Index (RVX), Exhibit 2.3 - EFA ETF Volatility Index (VXEFA), Exhibit 2.4 - Emerging Markets ETF Volatility Index (VXEFA) , Exhibit 2.5 - Sources: Glenmede Investment Management LP, Bloomberg Data through 10/31/2018 20+ Year Treasury Bond ETF Volatility Index (VXTLT)

03 CHOOSING A VEHICLE FOR CAPTURING THE VRP

Historically, the VRP has been a robust and persistent Exchange Traded Products or ETPs. These products anomaly, but how does an investor capture it? Among are priced with reference to other instruments and trade liquid asset classes, there are three primary vehicles intra-day. Often, they are benchmarked to particular used to gain exposure: futures, swaps, and options. indices. They are, in essence, short-term speculative vehicles for betting against volatility. Use of these Futures products allow asset owners to harvest the VRP while Volatility futures are exchange-traded standard relying on outside parties to handle the mechanics. contracts on implied volatility that allow investors to take advantage of the market’s volatility assumptions. Using ETPs, however, involves friction costs in the form For investors preferring to use short VIX futures to of fees, bid/ask spreads, and volatility drag. Reduced capture the VRP, there are two core strategies: trading liquidity in volatile markets can also impact returns. futures directly or gaining access through short or Investors retain exposure to the complexity and risks inverse exchange-traded products (ETPs). of futures trading, including the possibility of extreme spikes. Large ETFs in this area consistently warn clients Trading Directly that inverse and levered ETPs are not plain-vanilla The VIX futures market has become highly liquid ETFs, especially when markets are under distress. since trading began in 2004, and their daily settlement mitigates a good deal of counterparty risk, making this a potentially attractive method to capture VRP. Extreme Results: The Real World Impact of Leverage and Volatility Drag Direct VIX futures trading, however, is complex and On February 5, 2018, the VIX settled at 37.3, a 116 percent requires managing that daily settlement process, increase from the previous day’s close of 17.3—its largest including determining when collateral needs to be one-day move on record. As a result, ETPs with short VIX posted. Another concern is the effect of volatility exposure experienced massive losses, with some even drag when utilizing leverage, which impairs returns closing to avoid losses greater than 100 percent. It is likely that the substantial size and daily rebalancing mechanics at a faster rate as volatility of volatility increases (see of these ETPs exacerbated the spike in the VIX, as the “Extreme Results” in the box on this page). Additionally, ETPs were forced buyers of VIX futures contracts at investors that sell VIX futures to capture the VRP higher and higher prices to reset their required exposure. must take into account the shape of the volatility futures curve. When the curve is in “”, higher This market event demonstrates the concept of volatility future prices roll down towards spot prices, VIX future drag in real life. The ETPs’ daily rebalancing effectively sellers capture a positive roll yield. In a “backwardated locked in substantial losses. However, if the ETPs had futures market”, the VIX future price rolls up to the not rebalanced, their exposure going into the next trading day would have been greater than their net asset values, spot price, creating a negative roll yield. thereby violating the investment strategy of 1x short VIX exposure. Investors need to be aware of these situations and capable of trading accordingly. Volatility Swaps Using Short, Levered or Inverse ETPs as a A Volatility can be thought of as a contract on Substitute for Trading VIX Futures Directly the VRP itself. The buyer (“long”) of the swap receives Investors who do not want to trade futures directly can a payout if realized volatility turns out to be higher still use the VIX futures market to harvest the VRP by than implied volatility, and the seller (“short”) receives allocating a portion of their portfolio to short or inverse a payout if realized volatility comes in below implied

04 volatility. In other words, a short position in a Volatility the terminal value of options is defined by the notional Swap receives the VRP. This type of contract offers exposure, which, if fully covered, has no leverage. the advantage of more pure exposure to volatility than futures because the payout does not depend on the The relative simplicity of options strategies is another performance of any underlying asset, only the daily price benefit of using this approach. The VRP is embedded volatility. The payoff is based solely on the difference in option prices as compensation for the risk of sudden between realized volatility and the fair value strike, which spikes in market volatility. Unlevered option strategies, like is analogous to the implied volatility. cash-secured puts, can capture the VRP efficiently and are conceptually easier to understand. Equity put options However, volatility swaps are typically only offered to are financial “insurance” for equities where the equity put large institutions due to the required high notional values. buyer pays a premium to the equity put seller to avoid the The cost of using swaps tends to be significantly higher effects of a market decline. than that of options given the wider bid-ask spreads relative to the available option series used to replicate We believe the maturity and price transparency of the the value of the swap. In addition, swaps require both options market, along with the ability to quantify risk while incurring substantial legal fees to negotiate complex mitigating leverage, make it a better way to access VRP. documents and the ability to assess and manage This does not mean that there are no potential drawbacks. counterparty risk. Overall, volatility swaps may be too Cash-secured puts may involve delta hedging, which is expensive and complex for many types of investors to buying and selling stock to calibrate the portfolio’s desired capture the VRP. exposure. But any strategy that uses futures, swaps or options to capture the VRP generally features some type Options of systematic rebalancing, so this risk is not unique. Finally, options strategies can be used to acquire exposure to the VRP. It may not be immediately obvious how an Different Levels of Complexity option contract would capture the VRP. As described An inventory of all the potential advantages and earlier, however, the concept of implied volatility itself disadvantages of each VRP capture strategy is beyond comes from option pricing theory. Option prices reflect the the scope of this whitepaper. An investor’s comfort level of implied volatility. The higher the implied volatility, level with each usually comes down to that investor’s the higher the option’s price. Therefore, a short position tolerance for complexity. The following table attempts in an option creates a short position in the volatility of to illustrate some tradability factors investors assess the underlying asset. The liquidity and transparency of when trying to choose the right way to access the the options market may make it a preferable strategy VRP. In general, cash-secured puts on an asset’s price over futures or swaps. For example, the price behavior are easier to understand than futures or swaps on an of equity index options tends to be more straightforward asset’s volatility. For this reason, we focus on portfolio than price changes in volatility futures. This is because construction using options to harness the VRP.

Complexity Spectrum

Price Discovery Cash-Secured Put Volatility Futures Volatility Swaps Simple Complex (Trade Frequency)

Cash-Secured Put Volatility Futures Volatility Swaps Accessibility Simple Complex

Simple Cash-Secured Put Volatility Futures Volatility Swaps Complex Leverage (No Leverage) (Leverage)

Counterparty Simple Cash-Secured Put Volatility Futures Volatility Swaps Complex (Exchange (Over the Risk Traded) Counter)

05 PUTTING AN INTO ACTION

Part of the appeal of options strategies for capturing 2000, iShares MSCI EAFE ETF, iShares MSCI Emerging the VRP is that investors can use simple approaches Markets, and iShares 20+ Year Treasury Bond ETF. In without leverage to achieve their objectives. Selling the case of the S&P 500 and Russell 2000, we used at-the-money options is the starting point for most cash-secured put indices published by the CBOE: the investors; although, all options have different degrees of CBOE S&P 500 PutWrite Index (PUT) and the CBOE embedded VRP. Russell 2000 PutWrite Index (PUTR). There are currently no cash-secured put indices available for MSCI EAFE, Simple option-selling strategies include and MSCI Emerging Markets, or long-term Treasury Bonds, cash-secured put strategies. Exhibit 3 illustrates how the so we constructed simple simulations using options on terminal value of these two strategies are nearly identical. the iShares MSCI EAFE ETF (EFA), the iShares MSCI The arbitrage law of one price, known as put-call parity, Emerging Markets ETF (EEM), and the iShares 20+ Year demonstrates how covered calls (long stock, short call) US Treasury Bond ETF (TLT). Each simulated putwrite equal cash-secured puts (cash equivalent to strike, short strategy “sells” a 1-month ATM put on the underlying put). Both strategies limit downside and, in exchange, index at the close of trading on the third Friday of the cap upside potential, thereby minimizing unexpected month. The put either expires worthless or is bought outcomes. Given that both approaches produce similar to close at parity on expiration, and a new 1-month Twooutcomes, ways we focusto implement on the cash-secured our strategyput to explain ATM put is sold to replace the expiring put. The return capturing the VRP with options strategies. on cash used to collateralize the puts is derived from

EXHIBIT 3:Covered Call: Long S&P 500, Short Call Cash-Secured Put: Long Cash, Short Put Covered Calls and Cash-Secured Puts have similar Risk & Return Characteristics

6% 6% Covered Call Cash-Secured Put 4% 4%

2% 2% Cap Cap 0% 0%

-2% -2%

-4% -4%

-6% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% Covered Call Stock Cash-Secured Put Stock

For illustration purposes only. We believe arbitrage is possible when two securities have identical future payoffs, but different current market prices To demonstrate how cash-secured put selling could the Bloomberg Barclays U.S. Treasury Bills 1-3 Month work (also known as put-writing), we examine the Total Return Index. effect of selling at-the-money puts with approximately A drawback of this kind of analysis is the potential for Forone illustration month purposes to only. expiration. As with all investments, At-the-money loss is possible. (ATM) This material refers is intended to as a broad overview of the Portfolio Manager’s style and investment process, and is subject to change without notice. In addition, the views expressed represent the opinions of the portfolio manager. There can be no assurance that the same factors would result in the same decisions beingthe made strike in the future.price See closestAdditional Disclosures to the at pricethe end ofof this the document. underlying All data as of 9/30/2018,time periodunless otherwise bias. noted. We For were Institutional only Investor able Use to Only. test our putwrite strategies when listed options were available for all five 1index or ETF when the trade is initiated. We tested the strategy using five indices and ETFs: S&P 500, Russell of the underlying indices or ETFs, which set our starting

06 point at December 31, 2006. To adjust for this effect, we EXHIBITExhibit 4.2:6.2: examined the CBOE’s PUT Index (which has information PutWritePutWrite strategy Strategy Hashas Provided provided Downside downside Protection protection available starting in 1986) and its relationship to the 35% 30%

S&P 500 since June 30, 1986 to get a general idea of 25% the performance of a putwrite strategy relative to its 20% underlying index. We then narrowed our focus to the last 15% 10% 12 years, introducing the putwrite strategies executed 5% by selling at-the-money puts with approximately one 0% month to expiration. -5% -10% 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

S&P 500 CBOE S&P 500 Putwrite Index

LONG-TERM PERFORMANCE OF A Source: FactSet Data through 10/31/2018 CASH-SECURED PUT STRATEGY: CBOE S&P 500 PUTWRITE INDEX VS. S&P 500 EXHIBIT 4.3: Five-Year Rolling Periods

As summarized in Exhibit 4.1, the annualized return of the CBOE S&P PUT Index from June 30, 1986 to October 31, 2018 was 500 PutWrite S&P 500 9.8 percent, close to the S&P 500 return of 10.1 percent Best 5 Years Annualized 21.1% 28.5% for the same period. The PUT, however, had a monthly standard deviation of 9.9 percent vs. 14.8 percent for the more volatile S&P 500. An illustration of the annualized Worst 5 Years Annualized -0.5% -6.6% returns over 5-year rolling periods in Exhibit 4.2 shows the relative risk statistics of these two indices. The chart Gross of fees, annualized from 6/30/86 – 10/31/2018 shows that the PUT Index tends to lag equities during Past performance is not indicative of future results. strong bull markets, but makes up ground when equity returns are low or negative. CASH-SECURED PUT PERFORMANCE ACROSS ASSETS

Our analysis indicates that over a full market cycle, cash-secured put selling strategies show comparable EXHIBIT 4.1: Annualized Return returns to the underlying index or ETF, but with less CBOE S&P risk as measured by standard deviation. We believe it’s 500 PutWrite S&P 500 logical to assume that the lower risk is the result of hedging a portion of the equity exposure and replacing Annualized Return* 9.8% 10.1% it with the return generated from the VRP. We conclude that cash-secured put selling strategies provide Annualized Risk** 9.9% 14.8% diversification, which increases the return per unit of standard deviation as compared to equities.

*Gross of fees, annualized from 6/30/86 – 10/31/2018 **Annualized Standard deviation of monthly returns from 6/30/86 – 10/31/2018 Exhibits 5.1-5.5 display the return and standard Past performance is not indicative of future results. deviation for each of the put selling strategies along with the underlying index or ETF. In all cases, standard deviation was lower in the options strategies. Return

07 Exhibit 7: PutWrite Strategies Show Beneficial Risk-Return Comparisons

Russell 2000 and Russell 2000 PutWrite 7.1 S&P 500 and S&P 500 PutWrite 7.2 12/31/06 - 10/31/18 12/31/06 - 10/31/18 8% 10%

IWM 8% 6% RUT SPY PutWrite 6% 4% SPX 4% PutWrite

Annualized Return 2% Annualized Return 2%

0% 0% 6% 11% 16% 21% 6% 11% 16% 21% Annualized Standard Deviation Annualized Standard Deviation

Exhibit 7: PutWrite Strategies Show Beneficial Risk-Return Comparisons Exhibit 7: PutWrite Strategies Show Beneficial Risk-Return Comparisons MSCI EAFE and MSCI EAFE PutWrite MSCI Emerging Markets and MSCI Emerging Markets comparisons varied, as the U.S.-based equity indices 7.3 Russell 2000 and Russell 2000 PutWrite 7.1 S&P 500 and S&P 500 PutWrite EXHIBIT7.2 5.3: MSCI 12/31/06EAFE and - 10/31/18 MSCI EAFE PutWrite 7.4 PutWrite Russell 12/31/062000 and - 10/31/18 Russell 2000 PutWrite have had a much stronger12/31/06 recovery- 10/31/18 from 2009 lows 7.1 S&P 500 and12/31/06 S&P 500 - 10/31/18 PutWrite 7.2 10%8% 10% 12/31/06 - 10/31/18 than 10%the international equity ETFs. This made it 12/31/06 - 10/31/18 8% difficult for the cash-secured put indices to keep up 10% 8% IWM 8% against8% the S&P 500 and Russell 2000. However, in the 6% RUT IWM case of EFA and EEM, the putwrite strategies actually 8%6% 6% SPY PutWrite 6% RUT 6% outperformed. The cash-secured put selling index on 4% SPY PutWrite SPX 6%4% EEM TLT was just behind the underlying index over this 4%4% PutWrite 4% PutWrite SPX Annualized Return period, but the risk was cut nearly in half. Annualized Return 4% Annualized Return 2%2% PutWrite EFA Annualized Return 2% 2% PutWrite EFA Annualized Return 2% EEM ExhibitPutWrite 7: PutWriteStrategies Strategies Show Beneficial Show Beneficial Risk-Return AnnualizedComparisons Return 2%0% 0% Risk-Return0% Comparisons3 0% 6% 11% 16% 21% 6% 11% 16% 21% 6% 11% 16% 21% 6% 11% 16% 21% 0% Annualized Standard Deviation 0% Russell Annualized2000 and StandardRussell Deviation2000 PutWrite Annualized Standard Deviation 7.1 S&P 500Annualized and S&P Standard 500 PutWrite Deviation 7.26% 11% 16% 21% 6% 11% 16% 21% EXHIBIT 5.1: S&P 50012/31/06 and S&P - 10/31/18500 PutWrite Sources: FactSet , Bloomberg 12/31/06 Data - 10/31/18from 12/31/2016 through 10/31/2018 Annualized Standard Deviation Annualized Standard Deviation Gross8% of fees, past performance is not indicative of future results. 10% Long Term Treasury vs. Long Term Treasury PutWrite 7.5 12/31/06 - 10/31/18 MSCI EAFE and MSCI EAFE PutWrite EXHIBIT 5.4:MSCI MSCI Emerging Emerging Markets andMarkets MSCI Emerging andIWM Markets 8%7.3 6%7.4 12/31/06 - 10/31/18 MSCI10% Emerging Markets PutWritePutWriteRUT MSCI EAFE and12/31/06 MSCI EAFE - 10/31/18 PutWrite MSCI Emerging Markets and MSCI Emerging Markets SPY 7.3 12/31/06 - 10/31/18PutWrite 7.4 PutWrite 6%10% 10% 8% 12/31/06 - 10/31/18 4% SPX 10% 10% 4%8% PutWrite 8% 6%

Annualized Return 2%8% 8% Annualized Return 2%6% 6% Long-Term Long-Term 4% Treasury Treasuries 6% 4% 0% PutWrite EEM 6% 0% Annualized Return 4% PutWrite

Annualized Return 6%2% 11% 16% 21% 6% 11% 16% 21% EEM Annualized Return 4% 4% 2% Annualized StandardEFA Deviation Annualized Standard Deviation PutWrite

2% Annualized Return PutWrite 0% Annualized Return EEM EFA 2% Exhibit 7: PutWrite Strategies Show Beneficial Risk-ReturnSources: Comparisons FactSet0% , Bloomberg Data from 12/31/2016 through 10/31/2018 6% 11% EFA 16% 21% 2% Gross of fees, past performance is not indicative of future results. 0% 6% 11% 16% 21% AnnualizedPutWrite Standard DeviationEFA EEM 0% 6% 11% 16% 21% MSCI EAFE andAnnualized MSCI EAFE Standard PutWrite Deviation MSCI Emerging Markets and MSCI Emerging Markets 0% 7.3 Russell12/31/06 2000 - and10/31/18 Russell 2000 PutWrite 7.4 6% Annualized11% PutWrite Standard 16% Deviation 21% S&P 500 and S&P 500 PutWrite 7.2 6% 11% 16% 21% 7.1 EXHIBIT 5.2: Russell 200012/31/06 and Russell - 10/31/18 2000 PutWrite 12/31/06 - 10/31/18 12/31/06 - 10/31/18 Sources: FactSet , BloombergAnnualized Standard Data from 12/31/2016 Deviation through 10/31/2018 10% 10% Annualized Standard Deviation 8% Gross of fees, past performance is not indicative of future results. 10% Long Term Treasury vs. Long Term Treasury PutWrite 11 | Page 12/31/06 - 10/31/18 8%7.5 8% IWM 8% 6% 10% EXHIBIT 5.5:Long Long-Term Term Treasury Treasuryvs. Long Term and Treasury PutWrite RUT Long-Term7.5 Treasury PutWrite12/31/06 - 10/31/18 SPY 6% PutWrite 6% 6% 8% 10% 4% EEM SPX 4% 4% PutWrite 4% PutWrite 6% Annualized Return 8% Annualized Return 2% Annualized Return 2% EFA 2% Annualized Return Long-Term 2% Long-Term 4% PutWriteTreasuriesEFA 6% EEM 0% Treasury 0% PutWrite 0% Long-Term 0% Annualized Return 6% 11% 16% 21% Long-Term 2% 4%6% 11% 16%Treasuries 21% 6% 11% 16% 21% 6% Annualized11% Standard16% Deviation21% Treasury Annualized Standard Deviation PutWriteAnnualized Standard Deviation Annualized Standard Deviation Annualized Return 0% 2% Sources: FactSet6% , Bloomberg 11% Data from16% 12/31/2016 through21% 10/31/2018 Gross of fees, past performance is not indicative of future results. Long Term TreasuryAnnualized vs. Long Term Standard Treasury PutWriteDeviation 7.5 12/31/06 - 10/31/18 0% MSCI EAFE and MSCI EAFE PutWrite MSCI Emerging Markets and MSCI Emerging Markets 6% 11% 16% 21% 7.3 7.410% 12/31/06 - 10/31/18 PutWrite Annualized Standard Deviation 12/31/06 - 10/31/18 10% 10% 8% Sources: FactSet , Bloomberg Data from 12/31/2016 through 10/31/2018 11 | Page Gross of fees, past performance is not indicative of future results. 8% 8% 6% 3 Hypothetical 1-month ATM PutWrite indices are used for MSCI EAFE PutWrite,11 MSCI | Page Emerging Markets PutWrite 08 and 20+ year Treasury Bond Index PutWrite. See appendix for further disclosure. 6% 6% Long-Term Long-Term 4% Treasury Treasuries 4% PutWrite EEM Annualized Return 4% 2% PutWrite Annualized Return

Annualized Return 2% EFA 2% 0% PutWrite EFA EEM 0% 6% 11% 16% 21% 0% 6% 11% 16% 21% Annualized Standard Deviation 6% 11% 16% 21% Annualized Standard Deviation Annualized Standard Deviation

Long Term Treasury vs. Long Term Treasury PutWrite 11 | Page 7.5 12/31/06 - 10/31/18 10%

8%

6%

Long-Term Long-Term 4% Treasury Treasuries PutWrite Annualized Return 2%

0% 6% 11% 16% 21% Annualized Standard Deviation

11 | Page

0% 0% -10% -10% -20% -20% -30% Max Recovery -30% Max Recovery -40% Drawdown (Months) -40% Drawdown (Months) -50% PUT -32.7% 21 -50% PUTR -38.1% 22 -60% S&P 500 -50.8% 37 -60% Russell 2000 -52.4% 24 -70% -70% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

0% 0% -10% -10% -20% -20% 0% 0% Although standard deviation of monthly returns is a -30% Max Recovery -30% Max Recovery -10% EXHIBIT-10% 6.3: Drawdowns: -40% Drawdown (Months) -40% Drawdown (Months) widely accepted measure of risk, we also provide max MSCI-20% EAFE and MSCI EAFE PutWrite Simulation -20% PUT -32.7% 21 PUTR -38.1% 22 drawdown comparisons as an additional measure. -50%0% -50%0% -30% Max Recovery -30% Max Recovery -60% S&P 500 -50.8% 37 -60% Russell 2000 -52.4% 24 Exhibits-40% 6.1-6.5 illustrate the historicalDrawdown return(Months) of these -10%-40% Drawdown (Months) -10% -70% -70% indices-50% or ETFs versus theirPUT respective-32.7% putwrite21 during -20%-50% PUTR -38.1% 22 -20% -60% -30%-60% Russell 2000 -52.4%Max Recovery24 -30% Max Recovery

S&P 500 -50.8% 37 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 drawdown periods. In the most significant equity 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -40% Drawdown (Months) -40% Drawdown (Months) and-70% fixed-income market declines in recent history, -70% -50% EFA PW -42.5% 35 -50% EEM PW -38.2% 12 the putwrites show smaller drawdowns and quicker 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -60% 2006 2007 2008 2009 2010 2011 EFA2012 2013 2014 -57.4%2015 2016 642017 -60% EEM -60.4% 104 recovery times than its respective underlying ETF. -70% -70% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 PutWrite Strategies Show Smaller Drawdowns and 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Faster Recoveries4 Sources: FactSet , Bloomberg Data through 10/31/2018

EXHIBIT 6.4: Drawdowns: EXHIBIT 6.1: Drawdowns: 0% 0% MSCI Emerging Markets and S&P 500 and S&P 500 PutWrite Index MSCI-10% Emerging Markets PutWrite Simulation -10% 0% -20%0% -20% 0% 0% -10% -30%-10% Max Recovery -30% Max Recovery -10% -10% -20% -40%-20% Drawdown (Months) -40% Drawdown (Months) -20% -20% EFA PW -42.5% 35 EEM PW -38.2% 12 -30% Max Recovery -50%-30%0% Max Recovery -50% -30% Max Recovery -30% Max Recovery Drawdown (Months) -40% EFA Drawdown-57.4% (Months)64 EEM -60.4% 104 -40% Drawdown (Months) -10%-60% Drawdown (Months) -60% -40% PUT -32.7% 21 -40% PUTR -38.1% 22 -50% EFA PW -42.5% 35 -20%-70%-50% -70% -50% -50% EEM PW -38.2% 12 -60% S&P 500 -50.8% 37 -60% Russell 2000 -52.4% 24 EFA -57.4% 64 -30%-60% EEM Max-60.4% Recovery104 -60% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -70% -40%-70% 2006 2007 2008 2009 2010 2011 2012 2013 Drawdown2014 2015 (Months)2016 2017 -70% -70% -50% TLT PW -10.1% 12 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

2006 2007 2008 2009 2010 2011 TLT 2012 2013 -21.8%2014 2015 2016 21 2017 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -60% Sources: FactSet , Bloomberg Data through 10/31/2018 -70% Sources: FactSet , Bloomberg Data through 10/31/2018 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 EXHIBIT 6.2: Drawdowns: EXHIBIT 6.5: Drawdowns: Russell 2000 and Russell 2000 PutWrite Index Long Term US Treasuries and 0% 0% Long Term US Treasuries Putwrite Simulation -10% -10% 0% -20% -20% -10% -30% -30%0% Max Recovery -20%0% Max Recovery 0% -40% Drawdown (Months) -40%-10% Drawdown (Months) -30%-10% Max Recovery -10% -50% PUT -32.7% 21 -50%-20% PUTR -38.1% 22 -40%-20% Drawdown (Months) -20% TLT PW -10.1% 12 -60% S&P 500 -50.8% 37 -60%-30% Russell 2000 -52.4%Max Recovery24 -50%-30% Max Recovery -30% Max Recovery -70% -70%-40% Drawdown (Months) -60%-40% TLT -Drawdown21.8% (Months)21 -40% Drawdown (Months) -50% EFA PW -42.5% 35 -70%-50% EEM PW -38.2% 12 -50% TLT PW -10.1% 12 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -60% 2006 2007 2008 2009 2010 2011 EFA2012 2013 2014 -57.4%2015 2016 642017 -60% EEM -60.4% 104 -60% TLT -21.8% 21 Sources:-70% FactSet , Bloomberg Data through 10/31/2018 -70% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -70% Sources: FactSet , Bloomberg Data through 10/31/2018 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 For equities,2006 2007 the2008 market2009 2010 corrections2011 2012 2013 of2014 20082015 2016 to 2017 2009 when compared to their respective underlying ETF. represented the largest drawdowns since the Great Similarly, drawdowns occurred during 2009 and 2012 Depression, and in 2011 the market decline reached across . During these periods, our review bear market territory for many broad-based ETFs. indicates that a monthly ATM putwrite strategy on the Across both periods, on average, our analysis shows iShares 20+ year US Treasury Bonds ETF would have 0% 0% -10% monthly-10% ATM equity putwrite strategies would have experienced a smaller decline and faster recovery than -20% generated-20% smaller declines and quicker recoveries the underlying ETF. -30% Max Recovery -30%0% Max Recovery Drawdown (Months) Drawdown (Months) -40% 09-40%-10% 4 Hypothetical 1-month ATM PutWrite indices are used for MSCI EAFE PutWrite, MSCI Emerging -50% EFA PW -42.5% 35 -50%-20% EEM PW -38.2%Markets PutWrite12 and 20+ year Treasury Bond Index PutWrite. See appendix for further disclosure. -60% EFA -57.4% 64 -60%-30% EEM Max-60.4% Recovery104 Drawdown (Months) -70% -70%-40% -50% TLT PW -10.1% 12 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -60% TLT -21.8% 21 -70% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

0% -10% -20% -30% Max Recovery -40% Drawdown (Months) -50% TLT PW -10.1% 12 -60% TLT -21.8% 21 -70% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 EXPANDING THE EFFICIENT FRONTIER Exhibit 9.2: Strong Risk-Adjusted Return from Equity PutWriteEXHIBIT Portfolio 7.2: Risk-AdjustedETF Portfolio vs. Putwrite Return Portfolio from Equity PutWrite Portfolio Based on the prior discussion, we assumed that 12/31/2006 - 10/31/2018 incorporating a VRP harvesting strategy into an asset 8% allocation could improve the efficiency of a diversified portfolio. 6% Equity Putwrites Equity ETFs We tested the assumption, and our analysis suggests 4% that harvesting the VRP through a portfolio of options-

based putwrites on a traditional 60/40 portfolio of Return Annualized equities and fixed income would have delivered better 2% risk-adjusted returns than more traditional asset allocations that exclude the VRP. 0% 10% 15% 20% Annualized Standard Deviation We started by constructing an equity putwrite portfolio, for which we used a set of putwrite instruments that Sources: FactSet , Bloomberg Data from 12/31/2016 through 10/31/2018 Past performance is not indicative of future results. included exposure to large-cap U.S., small-cap U.S., international developed and emerging market equities in the weightings shown in Exhibit 7.1.

The hypothetical equity putwrite portfolio generated

nearly the same return while significantly reducing risk EXHIBIT 7.3: Comparisons for the PutWrite Portfolio versus the hypothetical equity ETF portfolio, as illustrated in Exhibit 7.2. In addition, the putwrite portfolio showed Equity PutWrite Portfolio vs. Equity ETF Portfolio more favorable comparisons for drawdowns and a Alpha 1.59% higher Sharpe Ratio for the almost 12-year analysis, as shown in Exhibit 7.3.5 Beta 0.62

Up Capture 57% EXHIBIT 7.1: Equity Portfolios - PutWrite vs. ETF Allocations Down Capture 47% Equity PutWrites Equity ETFs Sharpe Ratio of Equity Putwrite Portfolio 0.34 Large Cap 40% 40% Sharpe Ratio of Equity ETF Portfolio 0.25 Small Cap 10% 10% Max Drawdown Equity Putwrite Portfolio -36.79% International Developed 40% 40% Recovery Period 22 months Emerging Markets 10% 10% Max Drawdown Equity ETF Portfolio -54.45%

Recovery Period 50 months

Sources: FactSet , Bloomberg Data from 12/31/2006 – 10/31/2018 Past performance is not indicative of future results.

5 See disclosures for further explanation regarding the equity and equity putwrite returns. 10 Next, to see if results were similar for a balanced portfolio, EXHIBIT 8.3: Comparisons for the Putwrite Portfolio we compared a hypothetical balanced equity and fixed income putwrite portfolio against a hypothetical long- Balanced PutWrite Portfolio vs. Balanced ETF Portfolio only balanced equity and fixed income portfolio. The Alpha 1.50% weightings are presented in Exhibit 8.1. Beta 0.64

6 The results in Exhibit 8.2 show that investors would Up Capture 67% have captured 91 percent of the return (5.3% vs. 5.8%) with 76 percent of the risk (7.5% vs. 9.8%) using Down Capture 53% the balanced putwrite portfolio compared to the Sharpe Ratio of Balanced Putwrite Portfolio 0.60 hypothetical balanced equity ETFs/long-term Treasury portfolio. Sharpe Ratio of Balanced ETF Portfolio 0.51

Max Drawdown Balanced Putwrite Portfolio -21.87% Sharpe ratios and drawdowns of the hypothetical balanced putwrite portfolio also looked relatively Recovery Period 13 months attractive versus their underlying assets, as illustrated Max Drawdown Balanced ETF Portfolio -31.59% in Exhibit 8.3. Recovery Period 22 months EXHIBIT 8.1: Balanced Portfolios - PutWrite vs. ETF Allocations

Balanced Balanced Sources: FactSet , Bloomberg Data from 12/31/2006 – 10/31/2018 Past performance is not indicative of future results. Putwrites ETFs

Equity Putwrite 60%

Long-Term Treasury Putwrite 40%

Equity ETFs 60%

Long-Term Treasury 40% CONCLUSION

The Volatility Risk Premium (VRP) reflects a “premium”

EXHIBIT 8.2: ETF ExhibitPortfolio 10.2: ETF Portfolio vs. vs.Putwrite Putwrite Portfolio Portfolio 12/31/2006 - 10/31/2018 embedded in financial derivatives as a form of 8% compensation for providing insurance against sudden spikes in market volatility, which usually coincide with 6% market declines. Harvesting the VRP delivers a unique Balanced source of strong risk-adjusted returns and useful Balanced ETFs diversification benefits when added to a traditional asset 4% Putwrites allocation. We believe investors should consider a VRP

Annualized Return strategy as a consistent part of their asset allocations 2% in order to harvest the persistent premium. Finally, data shows that since the VRP is positive more than 80 0% percent of the time across a number of different asset 7% 9% 11% classes and geographies, trying to time entry or exit into Annualized Standard Deviation this asset class is of little value.

Sources: FactSet , Bloomberg Data from 12/31/2006 – 10/31/2018 Past performance is not indicative of future results.

11 6 See disclosures for further explanation regarding the equity and equity putwrite returns. ABOUT GLENMEDE INVESTMENT AUTHOR MANAGEMENT LP

Glenmede Investment Management LP (“GIM”) is a boutique asset management firm offering actively managed equity, fixed-income and alternative strategies. The firm serves a global client base of institutions, consultants and advisors through tenured teams and consistent decision-making processes. GIM fulfills its Sean E. Heron, CFA commitment to clients by following core principles such Portfolio Manager as delivery of dynamic high-quality solutions, direct access to portfolio managers and transparency from investment philosophy through portfolio construction.

Headquartered in Philadelphia, GIM delivers investment strategies through separately managed accounts and mutual funds. For further information, please visit http:// www.glenmedeim.com.

All data is as of 9/30/18 unless otherwise noted. Opinions represent those of Glenmede Investment Management, LP (GIM) as of the date of this report and are for general informational purposes only. This document is intended for sophisticated, institutional investors only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIM’s opinions may change at any time without notice to you.

The charts referenced herein contain constructed or hypothetical data, which we are using purely for illustrative purposes. Though gathered or created in good faith, there is no guarantee that this information is accurate. No representation is being made that any individual account will or is likely to achieve the results similar to those shown. In fact, there are frequently sharp differences between hypothetical or constructed results and the actual results actually achieved in any particular program. Hypothetical results are prepared with the benefit of hindsight and don’t account for the financial risks of actual trading. There are numerous other factors which can adversely affect trading results which are not captured in these hypothetical scenarios. There can be no guarantee that the historical analysis contained herein will reflect future performance.

This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. It may contain information which is not actionable or appropriate for every investor, and should only be used after consultation with professionals. References to risk controls do not imply that all risk is removed. All investments carry a certain degree of risk. Information contained herein is gathered from third party sources, which GIM believes to be reliable, but is not guaranteed for accuracy or completeness.

Simulated putwrite indices are hypothetical and for illustrative purposes only; they do not represent actual returns of any investors. Putwrite indices are designed to approximate the performance of selling a one-month At-the-Money (ATM) on an underlying ETF. Put options are traded on a monthly basis, usually on the third Friday of the month. The expiration date selected is the third Friday of the following month. The ATM strike price is determined on each trade date to be the closest available strike price to the closing price of the ETF. Trades are executed at the closing price on each trade date. Any put option that expires “Out-of-the- Money” (OTM) is assumed to expire worthless with no closing trade. Any put option that expires “In-the-Money” (ITM) is assumed to be bought to close at the put option’s intrinsic value, which is the difference between the strike price of the put option and the closing price of the underlying ETF on the put option’s expiration date. Put option positions are collateralized with a T-Bill portfolio which is assumed to earn the return of the Bloomberg Barclays U.S. Treasury Bill 1-3 Month Total Return Index. Each simulation begins on 1/1/2007.

“Equity ETFs” portfolio is constructed as follows: 40% “U.S. Large Cap” (SPDR S&P 500 ETF Trust), 40% “Int’l Developed Equities” (iShares MSCI EAFE ETF), 10% “U.S. Small Cap” (iShares Russell 2000 ETF), 10% “Emerging Markets Equities” (iShares MSCI Emerging Markets ETF)

“Equity Putwrites” portfolio is constructed as follows: 40% “LC Putwrite” (CBOE S&P 500 PutWrite Index), 40% “Int’l Developed Putwrite” (EFA ETF simulated putwrite), 10% “SC Putwrite” (CBOE Russell 2000 PutWrite Index), 10% “Emerging Putwrite” (EEM ETF simulated putwrite)

“Balanced ETFs” portfolio is constructed as follows: 60% “Equity ETFs” (see description above), 40% “Long Term Treasury” (iShares 20+ Year Treasury Bond ETF)

“Balanced Putwrites” portfolio is constructed as follows: 60% “Equity Putwrites” (see description above), 40% “Long-Term Treasury Putwrite” (TLT ETF simulated putwrite)

12 Contact us Glenmede Investment Management

Platforms and Sub-Advisory www.glenmedeim.com Jeffrey W. Coron, CIMA - Director of Institutional and Intermediary Distribution 1650 Market Street, Suite 1200 Direct: 215-419-6627 Philadelphia, PA 19103-7391 Email: [email protected] 215.419.6662 Institutions and Consultants Samantha Lowry - Director of Institutional Markets [email protected] Direct: 215-419-6741 Email: [email protected]

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Direct: 215-419-6903 Email: [email protected]

MichaelSoutheast Goold, and CIMA Midwest - Business Development Officer

Direct: 215-419-6902 Email: [email protected] The views, opinions and content presented are for informational purposes only. They are not intended to reflect a current or past recommendation; investment, legal, tax, or JasonWest and Laird Southwest - Business Development Officer accounting advice of any kind; or a solicitation of an offer to buy or sell any securities or investment services. Nothing Direct: 215-419-6193 presented should be considered to be an offer to provide any Email: [email protected] Glenmede Investment Management LP product or service in any jurisdiction that would be unlawful under the securities laws of that jurisdiction. KevinJarrett Heckman, Naiden - BusinessCFA - Business Development Development Associate Officer Direct: 215-419-6793 Email: [email protected] For Institutional Investor Use Only.