A photo of a black swan swimming to illustrate a BlackSwan investment strategy.

Courtesy of pxhere.com

A Louisville-based financial services firm is gaining national attention for developing a BlackSwan strategy that helps protect investors from steep losses when markets crash.

The strategy places 90% of funds in safe U.S. Treasury bonds and 10% in high-risk, high-reward S&P 500 call options. It was developed by Dan Cupkovic, director of investments at Louisville-based ARGI (an acronym pronounced ar-ghee.)

“It actually can do fairly well in good markets, like what we’ve seen, but also protects you against kind of extreme downward events,” Cupkovic said.

BlackSwan recently became an exchange-traded fund (ETF) — ticker symbol SWAN — through Chicago-based Amplify, meaning any investor — not just clients of ARGI — can benefit from the strategy.

A portrait of Dan Cupkovic

Dan Cupkovic

Cupkovic said that if unpredictable and severe events — Black Swans — occur twice a decade, the BlackSwan ETF generally outperforms the S&P 500 because it protects investors against steep losses.

For example, when the S&P 500 during a three-week period in December lost more than 15% of its value, SWAN dropped less than 7%. While the S&P has generated a better return since the low-point, SWAN still has been a better investment since early December because it didn’t suffer as steep a decline.

Since its inception on Nov. 6 of last year, SWAN has gained 5.67%, outperforming the S&P, which gained 4.45%, according to Amplify.

Cupkovic recently sat in a conference room in ARGI’s new offices at 2201 High Wickham Place, on the city’s far east side, and told Insider that he got the idea for BlackSwan in 2013 when he was doing research on risk mitigation strategies and reading a book about options as a strategic investment.

“(I) was trying to find … what every investor wants: pretty darn good upside with a limited downside,” he said.

Cupkovic pulled options data from TD Ameritrade software, played around with some numbers and had an epiphany: “When you … have this sort of barbell approach, with super risk-off things and super risk-on things, it makes a pretty good kind of attractive strategy,” he said.

His strategy: Investing 90% of the money in U.S. U.S. Treasury Bonds, targeting a 10-year maturity date. The bonds are very safe, being backed by the “full faith and credit of the U.S. government,” and tend to do well when the market crashes because people flee stocks and put money in safe securities, primarily cash and Treasury bonds.

A fever chart showing how the BlackSwan investment strategy has performed vs. the S&P 500

Data source: Leaping Black Swans white paper | Graphic by Boris Ladwig

The remaining 10%, what Cupkovic calls “home run money,” goes into S&P 500 call options. Buying options gives an investor the right to buy the asset at an agreed-upon price, called the strike price.

If the S&P 500 index rises above the strike price, the options tend to do exceptionally well in positive economic environments. However, If the S&P 500 falls over the course of a year, that means whatever money (10% of the portfolio in this case) was invested in the call options is likely lost.

As the risky options are only 10% of the BlackSwan portfolio, the losses of the portfolio are limited — though potential gains are unlimited. And the losses are partially offset because whenever the S&P declines in value, the Treasury bond portion of the BlackSwan portfolio is highly likely to gain value.

“Thinking about this practically,” Cupkovic said, “in the worst-case scenario with an economic crash you may lose 10% of your portfolio in the options, but if 90% of your portfolio appreciates you could be at breakeven or even a slight gain while stock markets are taking a beating.”

He took the BlackSwan idea to ARGI’s investment committee and got a good response, through leaders told Cupkovic that they needed to test the strategy’s robustness.

Experts including Indudeep S. Chhachhi, chair of the Department of Finance at Western Kentucky University, and William J. Trainor professor of Finance in the Department of Economics and Finance at East Tennessee State University, took a close look.

“They were really trying to beat it up … and they couldn’t really find any major flaws in it,” Cupkovic said.

The cover of the Journal of Investing from February 2019

The cover of the February edition of the Journal of Investing, which includes a white paper on ARGI’s BlackSwan.

Chhachhi and Trainor co-wrote a white paper, “Leaping Black Swans,” which was published in the February edition of the Journal of Investing.

The BlackSwan approach until recently was available only to ARGI clients, and only if they ponied up a minimum of $150,000. Now that it’s available as an ETF, almost any investor can buy it. SWAN is available through Merrill Lynch, Wells Fargo, Morgan Stanley, Schwab, Fidelity and others. A share of SWAN today costs about $28. 

The ETF now has assets of $92 million. And ARGI has clients with another $93 million in its in-house SWAN portfolio.

While Amplify manages the ETF, ARGI is a sub-adviser and provides intellectual property and education on the product. ARGI also helped seed the ETF with $60 million of its assets.

ARGI has an agreement with Amplify to get a portion of the income generated by the strategy. Cupkovic said that it’s a relatively inexpensive alternative strategy for investors. While the internal costs of ARGI’s peers generally run about 1% for ETFs, ARGI’s is about 0.5%.

Cupkovic said SWAN is an ideal investment for people near or in retirement who want to generate a healthy return but avoid catastrophic losses such as the ones people experienced during the last recession.

“I think it’s good for our clients to own and have some exposure to BlackSwan, especially given the environment now, being in the longest bull market since the Civil War,” Cupkovic said.

ARGI was founded in 1995 as a franchise of American Express Financial Advisors, but separated in 2003. It officially became ARGI Financial Group in 2005.

When Cupkovic joined the company 12 years ago, it had about 15 employees who were managing assets of about $200 million. Now, the firm has more than 200 employees and manages assets exceeding $2.5 billion. ARGI is a one-stop-shop that handles investments, insurance, estates, taxes and other matters. Investment advisers are fiduciaries, meaning they have to provide investments that are in the best interest of their clients.

Cupkovic said that while it took about five years to get from the BlackSwan idea to the SWAN ETF, gaining attention for the work is “definitely exciting.

“But, you know, truthfully, on a day to day, you just don’t think about it,” he said.

A portrait of Derek Bonifer

Derek Bonifer

“Dan’s way too modest,” said Derek Bonifer, ARGI portfolio manager.

“It’s pretty amazing when you see … the genesis of it,” he said. “I mean, it went from Dan trying to find different strategies to mitigate risk and looking at different options strategies to implementing that within a separately managed account for ARGI clients to … now having a part of an ETF that Amplify is managing to … we’ll be ringing the bell at the NYSE.

“You don’t hear those type of stories in Louisville all the time,” Bonifer said.