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Alpha and Strategy MEDIUM
Alpha and Strategy MEDIUM
3) 4)
Alpha generators Excerpts from strategy presentations made to clients over the last few years that are based on personal (in-house) proprietary research Dashboards Optimization tools
These are visual basic work environments that allow for uploading any data series, such as a macroeconomic data, and using simple transformations, search for and rank the best drivers for a given asset. These relationships can be simple ways to produce forecasts.
Steven Morales: Private and Confidential
Simple examples: one could set up an experiment to find the most relevant macroeconomic data for predicting the price of the S&P 500 6 months forward or the price of Oil 6m forward. Any asset can be analyzed. Any question can be considered. Key takeaways: 100s of drivers may be considered at once. Lesser known but valid relationships between fundamental data and markets can be found, helping to find some structure in otherwise incoherent market behavior, 100s of forecasts can be made at once, i.e. automated for consideration, discussion, visual representation of ideas, clear, repeatable methodology,
Example: Forecasting the S&P 500, ranking indicators, multiple forecasts and probability distribution
Example: Forecasting the S&P 500, ranking indicators, multiple forecasts and probability distribution
The model chooses between multiple multifactor models based on simplicity and reliability.
Key takeaways: large caps stock returns are many times dictated by simple metrics, however, each company (Cisco vs Intel) may be sensitive to different factors and to different degrees. Automating this process of determining direction and magnitude for expected returns across an equity universe is extremely important and easy.
Eliminating or tactically hedging portfolios and assets during periods of bad future risk reduces volatility and is a valid profit hoarding strategy. These models identify key volatility levels for assets: stocks, bonds, etfs, commodities, currencies, asset pairs, etc. Key takeaways: these models are not asset selectors but asset managers, the tactical hedging frequency is medium 12x per 5 years, the exponential cumulative wealth effects of reducing exposure during periods of bad volatility are impressive. The tactical hedging signals can be generated for an entire universe of assets. Monte Carlo stress testing suggests that this strategy is a good one, but definitely not the holy grail
Tactical Hedging: clear and simple profit hoarding methodology for stocks, bonds, etfs, commodities, currencies and pair trades.
However, the key to a coherent strategy have not always required original or complicated explanations. The December 2012 message to clients was all about,
Fed liquidity support of asset prices could be counted on given the still high levels of structural unemployment in the United States, keeping GDP below potential and variations of the Taylor suggested -400 bp of easing was probably in order.
Against All Odds - Mild Recovery and Election Year Supports Mild to Good Returns and Lower Risk in 2012
US Macroeconomics
Investment Policy Inspite of stable earnings and risk, sector and stock selection 1H 2012 should still recognize the following risks: 1) the global slowdown, 2) financial system risk and 3) the possibility of only range bound markets 1H. S&P p.obj: 1359
Investments
Stable to impoving company earnings, normalized credit conditions, cash returns to shareholders (buybacks and dividends) a better housing market, a comitted Federal Federal Reserve (QE3 / GDP Targeting), and a positve wind from the Election year all support a stable risk environment and mild (1H) to good (2H) stock market returns
Macro
Against all Odds the U.S. Economy is recovering mildly but consistently in the face of a global slowdown and important financial systemic risk from Europe
Sectors and Stocks Until evidence of further monetary and political support: Underweight Financials, Commodities Overweight: Stable Growth
Against All Odds - Mild Recovery and Election Year Supports Mild to Good Returns and Lower Risk in 2012
Growth
Steven Morales: Private and Confidential Business activity, GDP, leading indicators, lending conditions, housing PLUS corporate cash returns
Systemic Risk:
Financial Risk indicators are showing alarm bells, even as macoeconmic contiions improve, thanks to the crisis in Europe
Policy Action:
Fed recognizes the need to improve economic conditions further (QE3, GDP targeting)
Presidential Cycle:
A better and well supported economy could help Obama return to the White House. Worst case, less grid lock in Washington.
Strategy excerpts: 2009 2013
Against All Odds - Mild Recovery and Election Year Supports Mild to Good Returns and Lower Risk in 2012
NBER Business Cycle (+) Steven Morales: Private and Confidential Business Conditions (ISM, Philly Fed) (+) Leading Indicators (Conf Board) (+)
Unemployment (+)
Against All Odds - Mild Recovery and Election Year Supports Mild to Good Returns and Lower Risk in 2012
Investment Dashboards
Investment Dashboards
Portfolio Optimization
Targeting beta, ir ratio, smoothest return, alpha slope etc, sector weight ranges or any other desirable metric
Optimization Tools