Overlay

What does 'Overlay' mean

Overlay is a management style that harmonizes an investor's separately managed accounts, preventing the formation of inefficiencies. Overlay management uses software to track an investor's combined position from the separate accounts. Any possible portfolio adjustments will be analyzed by the overlay system, which ensures the overall portfolio will remain in balance and prevent any inefficient transactions from occurring.

BREAKING DOWN 'Overlay'

When an investor has separately managed portfolios, that investor is placing assets under the control of different managers. This can cause inefficiencies if the managers begin making transactions that either increase the risk of the overall portfolio, have negative tax effects, or unbalance the investor's positions.

For example, if one of the separately managed account traders purchases an asset and another trader sells it, the investor will be left with a neutral position and two transaction fees. Overlay management seeks to improve the communication between the separate managers, allowing for increases in transaction efficiency.

RELATED TERMS
  1. Currency Overlay

    The outsourcing of currency risk management to a specialist firm, ...
  2. Inefficient Portfolio

    An inefficient portfolio is an investment portfolio that delivers ...
  3. Multiple Managers

    A situation that occurs when an investment portfolio's assets ...
  4. Money Manager

    A business or bank responsible for managing the securities portfolio ...
  5. Managed Futures

    An alternative investment strategy in which professional portfolio ...
  6. Multi-Discipline Account

    A type of investment account that allows access by several specialized investment ...
Related Articles
  1. Credit & Loans

    How Lender Overlays Prevent Mortgages

    Loan applications are increasingly being rejected because of lender overlays.
  2. Trading Strategies

    Beginner's Guide To Stockcharts.com: Changing The Chart Type

    This is one of the strengths of stockcharts.com as there are all sorts of chart types available to users. Every option is available to all users, so even free members have the ability to express ...
  3. Professionals

    Preparing For A Career As A Portfolio Manager

    Find out what it takes to win a spot in one of the most coveted financial careers.
  4. Mutual Funds & ETFs

    Separately Managed Accounts: A Mutual Fund Alternative

    It takes a hefty minimum investment to get in in on an SMA, but these offer some distinct advantages.
  5. Professionals

    Financial Careers: Portfolio Management Jobs

    By Brian Perry This chapter will look at portfolio management jobs. These are some of the prestigious roles in the finance industry and involve directly managing institutional and retail client ...
  6. Professionals

    The Workings Of Equity Portfolio Management

    Achieve analytical efficiency by applying your evaluation to a key set of stocks.
  7. Executive Compensation

    Portfolio Manager: Job Description & Average Salary

    Discover the duties and responsibilities of a portfolio manager, along with education, training and skills requirements, and salary expectations.
  8. Mutual Funds & ETFs

    Separately Managed Accounts: A Boon For All

    We provide an explanation of individual cost basis and the advantages it brings to these accounts.
  9. Mutual Funds & ETFs

    The 4 Key Elements Of A Well-Managed Portfolio

    If you choose an actively managed portfolio, be sure that your manager isn't neglecting one of these four points.
  10. Investing

    What is Portfolio Management?

    Portfolio management is the act of maximizing the return on a portfolio. This is done with trading decisions made for the marketable securities in that portfolio. A portfolio manager, or a team ...
RELATED FAQS
  1. What is the difference between passive and active portfolio management?

    Understand the difference between active portfolio management and passive portfolio management, and how each strategy benefits ... Read Answer >>
  2. How are negative correlations used in risk management?

    Learn about risk management and how negative correlations between assets are used to diversify and hedge risk associated ... Read Answer >>
  3. What is the difference between passive and active asset management? (SPY)

    Find out about active asset management, passive asset management, how these strategies are utilized and the differences between ... Read Answer >>
  4. How is portfolio variance reduced in Modern Portfolio Theory?

    Learn about modern portfolio theory, specifically what it asserts about asset allocation and managing portfolio risk through ... Read Answer >>
  5. What's the average salary of a tax manager?

    Learn about the average annual salary for a tax manager and some of the factors that can affect a tax manager's potential ... Read Answer >>
  6. What licenses and certifications do you need for a career in portfolio management?

    See what it normally takes to begin a career in investment portfolio management, including education, experience, licenses ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center