Take a closer look at innovations and shifts in investment management and risk assessment.

  • Alpha Calibration: Aligning Your Portfolio Construction Process for Optimal Results

    For both quantitative and fundamental managers, alpha calibration is a critical part of the optimal portfolio construction process – but are you doing it right? Most optimization processes include an objective function with one or more terms. When multiple terms are included, managers often mix and match the scaling of the terms which is asking the optimizer to compare apples to oranges and leads to less relevant or suboptimal allocations.

    In this paper, we review the different types of alphas generally used by portfolio managers and discuss potential consequences of not calibrating their alphas. We provide an overview of the calibration process with its intuition. In particular, portfolio managers need to take into account the current volatility environment and their limited forecasting ability in order to achieve properly calibrated alpha signals.

    Dominic Clermont, Front Office Solutions Director, Qontigo Research Paper No. 165
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  • The Weakening Index Effect

    The Index Effect has weakened significantly since 2011. The Index Effect is the phenomenon where stocks that are added to an index experience positive excess returns in the days before being officially added, while stocks that are removed from an index experience negative excess returns. The weakening of the Index Effect has been pronounced for large- and mid-cap stocks, though it still can be observed in many indexes with small-cap stocks.

    The article also examines the importance of several other aspects related to the Index Effect, including illiquidity and unscheduled rebalances. The weakening of the Index Effect has occurred concurrently with a substantial increase in passive investing. One potential explanation for the weakening is that the ETF market makers (e.g., authorized participants) trade on price disparities as soon as they occur, eliminating any sustained positive or negative price movements. If true, this would be evidence that ETF trading adds liquidity to the market.

    Anthony A. Renshaw, PhD Research Paper No. 164
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  • Introducing ROOF Market Portfolios: Capitalizing on the Mood Swings of Markets?

    Qontigo’s ROOFTM Scores were created to quantify the changing risk appetites of investors: are they bullish and risk-tolerant, neutral, or bearish and risk-averse? And in what direction are those sentiments trending? An acronym for Risk-On/Risk-OFF, the first ROOF variant, Style ROOF, was introduced in 2018. It tracks returns of eight fundamental style factors as a way of quantifying investor sentiment. The Sector ROOF, introduced in 2019, defines a risk-on/risk-off “sector personality”, and then looks at sector performance for an additional perspective on investor sentiment.

    Olivier d'Assier, Executive Director, Applied Research APAC Research Paper No. 163
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  • Qontigo Insight Q2 2020 Risk Review: The Storm After the Storm?

    Equity markets posted one of the best quarters in more than a decade, but most were not able to cross into black territory for the year. Volatility—of benchmarks, sectors, risk model factors, etc.—came down from the year-to-date peaks, though remained high. Style factors saw an unusual performance, increased volatility, and large changes in factor correlations, which likely had a significant impact on active risk.

    Applied Research Team Research Paper No. 162
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  • The Coronavirus Chronicles: The Challenges of Stress Testing in a Pandemic

    They say risk management is a journey, not a destination. In that spirit, what follows depicts the evolution of a stress test designed to keep pace with a pandemic.

    Olivier d'Assier, Executive Director, Applied Research APAC Research Paper No. 161
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  • Introducing STOXX® Factor and ESG-X Factor Indices: Get More From Your Premia Exposures

    In this paper, Qontigo’s Applied Research Team presents the recently launched STOXX Factor and ESG-X Factor Indices.

    Melissa R. Brown, CFA Managing Director, Applied Research Research Paper No. 160
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  • Mean-Reversion and Market Recoveries: Stocks Hit Hardest First Tend to Outperform… Will Covid-19 Follow the Pattern?

    Do equities that suffer the greatest losses in the initial stages of a major market downturn subsequently outperform during the recovery? Here we examine the 10 largest US equity downturns of the past 38 years along with the current Covid-19 market crisis focusing on the performance of the worst performing quintile during the initial downturn, in the expectation that these names might experience mean-reversion and gain more during the market recovery than they lost at the outset.

    Anthony A. Renshaw, PhD Director, Index Solutions Research Paper No. 159
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  • Qontigo Insight Quarterly Risk Review Q1 2020: The Corona Quarter

    The first quarter of 2020 came in roaring like a lion and went out like a (slaughtered) lamb. After stock indices were pushing new records in the first half of the quarter, the bloodbath in equities that followed not only ended the longest-running bull market in the US history , but also threw indices worldwide into a bear market. Volatility skyrocketed with major benchmarks seeing their risk increase two- to six-fold, with all components of risk contributing to the climb.

    Qontigo Applied Research Team Research Paper No. 158
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  • Adding Alpha by Subtracting Beta: A Case Study on How Quantitative Tools Can Improve a Portfolio's Returns

    During turbulent risk environments, it is imperative that fundamental portfolio managers learn to understand factor exposures to know what is driving their portfolios’ returns. By avoiding the performance drag that results from certain risk bets they can deliver higher alpha. Fundamental managers can leverage quantitative tools to help identify and reduce the impact of those unintended bets, while still maintaining their investment views and goals. In this paper, we'll use a "real world" portfolio to illustrate how quantitative tools can improve a portfolio's realized return and information ratio by reducing exposures to factors on which the manager did not have a view, while maintaining the focus on stocks the manager expected to outperform.

    Qontigo Equity Research Team Research Paper No. 157
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  • Comparing Two Financial Crises: Insights the GFC Offer Us Today

    This paper explores the similarities between the current COVID-19 crisis and the early stages of the global financial crisis (GFC) in an effort to identify sensible investment strategies for the next few weeks. Since some stocks experienced strong reversals during the GFC, we suggest that may occur now. In addition, factor strategies that outperformed during the GFC may also do well now.

    Anthony A. Renshaw, PhD Research Paper No. 156
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