In today’s investment environment, if one wants to make any positive return on investment (and avoid negative inflation-adjusted returns) one must accept some risk.   CAPM presents a simplified model of risk as embodied by, sigma, or standard deviation.  Interestingly, the basic CAPM risk model does not encompass the concept of utility.

It turns out that it is relatively easy to shape, or re-shape, an asset’s risk-profile.  Assume that, on an amortized basis, option trades constitute a zero-sum game;  It is possible to reshape Gaussian risk within a Gaussian-risk band… for free.  Such risk-shaping techniques, applied to maximizing utility, are key principles of the Sigma1 Fund.  [One example is a bear put spread paired with an equal coupling of the underlying -- creating an utility-positive position play.  Another such utility-positive play is a covered call.]

Of course, the trading of options is a potentially (slightly) negative-sum game after trading expenses are accounted for.  The key take-away is that options (and synthetic options) are inexpensive tools via which to maximize utility for “almost free”.  Almost free can easily be 30-35 basis points per annum  (see Σ1 Fund Strategy).  With optimization and improved economy-of-scale this “almost free” component can be further improved.

In essence, Σ1 seeks to create  a classically-CAPM-optimized portfolio and then re-shape its risk profile in a utility-friendly manner.  Positive alpha is the penultimate goal, but reshaping sigma for enhanced utility is the ultimate goal.