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. Wealth Management

    A professional service which is the combination of financial/investment ...
  2. Asset Management

    1. The management of a client's investments by a financial services ...
  3. Investment Advisor

    As defined by the Investment Advisors Act of 1940, any person ...
  4. Modern Portfolio Theory - MPT

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

    The person or persons responsible for investing a mutual, exchange-traded ...
  6. Portfolio Management

    The art and science of making decisions about investment mix ...
Related Articles
  1. Portfolio Management For The Under-3 ...
    Investing Basics

    Portfolio Management For The Under-3 ...

  2. Introduction To Multi-Discipline Accounts
    Investing Basics

    Introduction To Multi-Discipline Accounts

  3. The Workings Of Equity Portfolio Management
    Professionals

    The Workings Of Equity Portfolio Management

  4. Modern Portfolio Theory: Why It's Still ...
    Active Trading

    Modern Portfolio Theory: Why It's Still ...

comments powered by Disqus
Hot Definitions
  1. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  4. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  5. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center