We continue to hope that you and your loved ones remain healthy and safe as we all adopt the new norm of staying sheltered in place.
As a reminder, the Axioma US Medium Horizon model uses trailing 1 year daily returns in regression. Here we see that Beta has rebounded significantly on both an absolute and normalized basis since hitting a recent nadir of -12.03% YTD performance on 3/18. Since then, it has rallied back +9.5% and sits at -1.63 SD below the mean.
Adding Alpha By Subtracting Beta
As the market declined, the PM purposefully lowered gross and net exposure, including reversing exposure to certain industries. For instance, they were net long Specialty Retail by 5.4% on 2/12, and had shifted to become net short that same industry by -5.4% on 3/6. Even so, exposure to Market Sensitivity from the sector increased from 0.015 (basically flat) to 0.2, even as the flip in exposure occurred.
As a result, the portfolio suffered a significant drawdown, primarily driven by performance drag from Market Sensitivity:
Around this time, the PM reached out to Omega Point to help manage this exposure, as they were frustrated that their efforts to remain market neutral had only resulted in losses. We collaborated with them to create a simple optimization where we sought to keep gross and net exposures the same, while reducing drag from Market Sensitivity and other factors.
As you can see, by leveraging the Omega Point optimization, this manager would have been able to improve performance by up to 1.92%, while reducing Total Risk by almost 4%! This manager had positive alpha characteristics throughout the period, so we were simply able to reduce the noise from factors in order to rescue this portfolio.
US & Global Market Summary
US Market: 3/20/20 - 3/26/20
Factor Update: Axioma Worldwide Equity Risk Model (AXWW4-MH)
Please let us know if you’d like to explore how we can help you mitigate the impact from factors on your own performance as we forge on through this period of volatility and uncertainty.