Overlay

AAA

DEFINITION of 'Overlay'

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.

INVESTOPEDIA EXPLAINS '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. Asset Management

    1. The management of a client's investments by a financial services ...
  2. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  3. Portfolio Manager

    The person or persons responsible for investing a mutual, exchange-traded ...
  4. Wealth Management

    A professional service which is the combination of financial/investment ...
  5. Portfolio Management

    The art and science of making decisions about investment mix ...
  6. Investment Advisor

    As defined by the Investment Advisors Act of 1940, any person ...
Related Articles
  1. Investing Basics

    Portfolio Management For The Under-30 Crowd

    Young investors have some advantages over their older counterparts. Read on to learn how to build a portfolio that will grow with you.
  2. Investing Basics

    Introduction To Multi-Discipline Accounts

    You get multiple managers, affordable diversification, customization and consolidated reporting all under one roof.
  3. Professionals

    The Workings Of Equity Portfolio Management

    Achieve analytical efficiency by applying your evaluation to a key set of stocks.
  4. Active Trading

    Modern Portfolio Theory: Why It's Still Hip

    See why investors today still follow this old set of principles that reduce risk and increase returns through diversification.
  5. Mutual Funds & ETFs

    The Quest To Build A Unified Managed Account

    Find out why the convenient, customizable UMA should be the next big thing in managed money.
  6. Investing

    What’s The Essence Of Smart Beta In Fixed Income?

    In essence, smart beta strategies seek to re-write index rules to capture factors, such as value, quality, or low volatility, in their stock portfolios.
  7. Investing

    How To Invest Outside Your Comfort Zone?

    Sometimes, when it comes to investing, we have to step outside of our comfort zone and use investment tools to express a market view or specific outcome.
  8. Mutual Funds & ETFs

    How To Choose The Right ETF?

    Choosing the right ETF really isn’t that complicated. If you stay focused on a few key areas, you may find the experience to be much easier.
  9. Economics

    What is a Promissory Note?

    A written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.
  10. Economics

    Understanding Money Supply

    Money supply – also called money stock -- refers to the total amount of currency and other liquid financial products in an economy at a particular time.

You May Also Like

Hot Definitions
  1. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  2. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  4. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  5. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  6. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
Trading Center