What Sets Us Apart
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Win-Win Risk Mitigation Strategies
Without the Win-Loss Compromises
Our strategies address the issue of risk head-on: Investors’ ultimate risk is shortfall—not volatility or drawdowns.
Shortfall is the probability of running out of funds to pay bills or meet funding goals (which for high-net-worth investors, at a minimum, is represented by the going cost of capital).
Shortfall has two sources—persistent losses or insufficient gains. And it is this duality that causes all the challenges in risk management.
Conventional portfolios seek to mitigate shortfall by symmetrically limiting or boosting the capture of both gains and losses. We believe this is a futile exercise right from the get-go:
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OUR STRATEGIES seek to deliver an asymmetric treatment by simultaneously targeting a higher capture of gains and a lower capture of losses.
They are engineered to pursue this win-win solution by increasing their exposure during periods of bullish market regimes, which are characterized by a natural preponderance of gains, while lowering their exposure during periods of bearish market regimes, in which losses are prevalent. So, instead of maintaining a steady exposure, like strategic asset allocation disciplines do, our strategies aim to average Moderate across a full market cycle by balancing their assertive profile during sustained rallies with their ultra-defensive posture during sustained declines.
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CONVENTIONAL PORTFOLIOS seek to mitigate shortfall by symmetrically limiting or boosting the capture of both gains and losses. We believe this is a futile exercise right from the get-go:
e.g. Moderate/Growth & Income and Conservative /Income portfolios may appear to protect investors from steep losses, thereby reducing the risk of shortfall, but they do that only at the expense of also limiting portfolios gains which, in turn, we believe augments the risk of shortfall—a Win-Lose approach does not systematically reduce investors’ ultimate risk of shortfall, outside of the chance occurrence of an advantageous market environment
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Shouldn’t investors be concerned about volatility and drawdowns, the two measures that dominate the traditional approach to risk management? |
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OUR STRATEGIES find volatility and drawdowns to be only downstream, peripheral, and symptomatic manifestations of the ultimate risk of shortfall. Our research has shown that the impact of various risk markers on portfolio trajectory is far from absolute and depends heavily on the status of the market regime. Markets can go up on high and go down on low volatility and some of the highest-volatility episodes accompany the onset of major rallies and bull markets, which are highly profitable. In bullish market regimes, volatility and drawdowns are strongly mean-reverting, creating with their switchbacks the risk of costly whipsaws for conventional strategies that operate on fixed tolerance thresholds. In contrast, during bearish market regimes volatility and drawdowns tend to be cumulative and ought to be avoided or dampened. Our strategies employ a set of sophisticated filters that seek to de-noise, contextualize, and cluster in cohesive interpretative syndromes the raw signs of a potential market regime shift that emanate from the economy and the market—and that includes measures of volatility and drawdown. |
