During times of high market volatility, such as 2008 and 2009, the fund may have close to 100% of its portfolio under a buy-write strategy. Now that section of the portfolio constitutes about 58% of its assets. Based on the value of the stocks in that sleeve, the call options generate monthly premium income of over 3%.

To maximize premium income, Levinson looks for options on volatile stocks that he believes are priced too cheaply. An actively managed options "roll" strategy helps ensure that a stock won't get yanked out of the portfolio too quickly in an up market or fall too far in a decline.

Stocks that make good candidates for a buy-write strategy include those in jumpier sectors such as technology and energy, which allow the fund to generate maximum premium income. Companies recently included in the buy-write section include Noble Energy and Yahoo.

There's no magic formula or bold strokes of genius for stock picking here. "The filtering and selection process here is pretty methodical and is based more on quantitative factors versus any insight into a company's business model," says Levinson.
About 38% of the portfolio is in long positions that aren't covered by an options writing strategy. Levinson, who doesn't make any outsize stock or sector bets and typically stays within close range of S&P 500 sector weightings, says the fund is slightly overweight in more defensive areas such as health care, consumer staples, utilities and telecommunications.

Because he feels the market is range-bound at this point, he is zeroing in on stocks that can generate a decent amount of dividend income such as Bristol-Myers Squibb, Eli Lilly, AT&T, Verizon and Duke Energy. The focus generates a healthy 3.6% yield on the long-only portion of the portfolio.

In addition to buy-writes, the fund can also employ other strategies, although Levinson uses them sparingly at this point. It has about 8% of its assets in convertible preferred stocks in financial firms such as The Hartford and MetLife, which yield north of 5%. Levinson says that while he sometimes has a higher allocation to convertible bonds, a lack of new issuance and low yields relative to investment-grade securities make them less attractive at this point.

The fund can also invest up to 30% of its assets in high-yield, below-investment-grade securities or move up to 100% of its assets into cash for temporary defensive purposes. Other potential investment tools include zero coupon bonds, put options or futures contracts.

Advisors Warm Up Slowly
With just $100 million in firm assets under management and $49 million in the fund, Levinson admits the unorthodox strategy hasn't been an easy sell to financial advisors used to strict adherence to style boxes and long-only equity investing. But he hopes that as the fund hits its three-year anniversary it will show up on more radar screens, and he believes that both retail investors and financial advisors are ready for a fund that combines the transparency and convenience of mutual funds with the risk-moderating strategies of a hedge fund.

"There's been a pushback from hedge fund investors over illiquidity, lack of transparency and structural inefficiencies, and they are ready for something different," he says. "I believe we are in the early stages of melding the hedge fund world with the mutual fund world."

One barrier that may be difficult to get around is the fund's above-average expenses. With an expense ratio of 2%, plus high trading costs that eat into returns, the Schooner portfolio doesn't come cheap. Although Levinson tries to moderate the tax bite from frequent trading and the high portfolio income with tax loss harvesting, he admits that the shares are preferable in a tax-deferred account.