We distinguish three main financial risks: market, counterparty and liquidity risk. In this article we focus on market risk. We describe the risk management approach in our Core Quant strategies.
Alle Rechte vorbehalten. Note that these asset class assumptions are passive, and do not consider the impact of active management. All estimates in this document are in US dollar terms unless noted otherwise.
Anmelden Setting the risk budget: active share and risk controls The Core Quant strategies use an active share framework to manage the risk objective of the portfolio. The outcome of our stock selection model is combined with a proprietary portfolio construction algorithm and a unique set of risk controls.
The portfolio construction algorithm calculates the most optimal transactions that have to match a pre-set active share range.
In this way, investment decisions and risk management are fully integrated. Diversify, diversify, diversify Restricting the active share alone is not sufficient to define the risk budget. Portfolios with the same active share can therefore have widely varying tracking error levels: from low diversified stock pickers to high concentrated stock picks.
Capital market assumptions
Our goal is to achieve controlled factor exposure by diversifying over a large number of stocks and thereby reducing stock specific risk. As a result of our factor-based stock selection approach and diversified portfolios, performance contributions of individual stock holdings are usually small and total contribution is driven by a large number of stocks.
The aim of our process is to take tilts to investment factors, not concentrated exposures to individual stocks. This approach allows us to reduce active risk, without giving up active return.
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Active share ranges help constrain tracking error The active share ranges we apply in our strategies are selected to ensure that the portfolio does not exceed a set ex-ante tracking error limit. For the enhanced indexing developed markets and emerging markets strategies this allows us to consistently achieve a low realized tracking error.
Allocate risk budget to areas where we expect to add value The aim of the stock selection model is to create a portfolio with holdings that, taken collectively, have the ultimate stock profile: attractive valuation, high quality, higher than average analyst revisions and positive share price momentum.
The impact of management Alpha Random Error In a particular time frame, none of these market factors is necessarily positive. However, over longer periods the premiums are persistent and generous. So, a portfolio tilted away from the center of the market will act differently from the market, but will not necessarily have more risk. The further you tilt the portfolio, the less it will look like the more commonly reported indexes. Investment advisors understand that they can get fired for looking too different from everybody else.
Some stocks within the universe may score better on — for example - valuation than our portfolio, but no single stock scores better than our portfolio on all factors.
The strategies have been developed to maximize exposure to high ranked stocks by means of overweights and low ranked stocks underweights while maintaining cash, country, sector, size single index model+portfolio construction beta neutrality. We aim to maximize the active risk contribution stemming from tilts to our identified factors, and reduce exposure to non-rewarded risks.
A diversified, balanced model will outperform single-factor models over time because value and momentum will each experience periods of weak performance.
By combining factors, we can realize maximum diversification benefits.
It is critical to manage downside risk. Refrain from taking risks that add no value in the long run Risks that are not adequately rewarded should be avoided. This has implications for both single index model+portfolio construction definition of our factors and our portfolio construction process.
The idea behind our integrated risk management approach is that if factors have certain undesirable properties, it is best to address them immediately in the definition of the factors. For each alpha factor we first identify its exposures to other factors, and then eliminate undesirable exposures.
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An example is the way in which we enhance a generic momentum strategy. Generic momentum strategies exhibit large dynamic exposures to various risk factors.
For instance, during bull markets a generic momentum strategy is typically biased towards high-beta stocks because these stocks tend to have the highest return when markets go up. The dynamic beta exposures of a generic momentum strategy contribute a lot to its risk but hardly anything to its return. One should reduce - or single index model+portfolio construction possible even eliminate — the allocation of disco frauen kennenlernen to low-breadth decisions.
For us that implies that we aim to be neutral towards sectors, industry groups, regions, countries and beta.
By avoiding exposures to these unrewarded systematic risks, we are able to maximize the available risk budget in areas where we do add value. Human overview The portfolio managers exercise a human overview to ensure that there are no additional sources of risk that have not been captured through the rules-based investment process.
This human overview is exercised for the purpose of risk reduction only.
- For instance, an indication of future risk can be found in the balance sheet and the income statement; an idea as to the growth of the company can be found from trends in variables measuring the company's position; the normal business risk of the company can be determined by the historical variability of the income statement; and so on.
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- Über dieses Buch "Portfolio Selection by Harry Markowitz was a seminal development transforming the field of financial investment from an art to a science.
Examples of situations in which we may consider intervening are specific issues that drive stock prices like takeovers, disasters or political risks. However, the stock price may no longer be driven by underlying model factors.
To summarize Taking risk is a necessary condition to outperform, but by no means a sufficient perri kiely single. The key takeaway is that risk management has important lessons and implications for any investment strategy. We take these lessons to heart in developing and managing our Core Quant strategies.