Quantitative (rules-based) disciplines are applied to a universe of securities that attempt to deliver protection in falling markets and participate in rising market conditions. In addition, the sub-strategies within the portfolio are allocated based upon the targeted risk metrics of the portfolio. Therefore, the overall portfolio risk is managed by a sub-set of non-correlating strategies that all have unique active management techniques. (See definitions below). Conversely, passive management (traditionally referred to as Buy & Hold) is buying and holding a universe of securities that do not trade due to a change in market condition and whose attempt to manage risk is to simply diversify amongst broad asset classes. In addition, a discretionary manager is required to adequately deliver an actively managed portfolio whereas; a passively managed portfolio doesn't require discretion.
Active Management Techniques:
Tactical. Tactical management is the application of various techniques to measure whether a security is trending up, or trending down. Tactical management attempts to hold securities that are trending up, and sell them when trending down. The goal is to hold the winning positions as long as possible, and cut your losses quickly on loosing trades. This can lead to short term deviation from a stated benchmark in service of a long term goal to provide maximum protection from large drawdowns.
A measurement of the risk-adjusted-return of the portfolio. The alpha of the benchmark is always equal to 0.0%. A positive alpha indicates the portfolio has performed better than its benchmark. A negative alpha indicates the portfolio's underperformance from its benchmark. Therefore, an alpha of 5.0% is the return of the portfolio in excess of its benchmark. Conversely, an alpha of -5.0% is the return below the comparative benchmark.
Reference to a comparative index to the identified portfolio that closely represents its characteristics, strategy objectives, number and type of component investments, their volatility and the weight ascribed to them.
A comparative measurement of the risk of a portfolio as determined from its sensitivity to market movements of its benchmark. The beta of the benchmark is equal to 1.0%. The lower the beta of a portfolio, the less volatile or risky when compared to its benchmark. Therefore, if the beta of a portfolio is .40%, then it is 60% less risky than its benchmark (1.0 minus .40 = .60). Low or negative betas may also be indicative of low correlation of return with the benchmark. Conversely, if the beta of the portfolio is 1.40%, then it is 40% more volatile/risky than its benchmark.
Black Swan Crisis Event:
Defined by Nassim Nicholas Taleb in his research as an event that is unpredictable, highly improbable, and carries a massive impact. The 2008 Global Debt Crisis, 9/11, and the Nasdaq Bubble are examples of Black Swan events since 2000.
Capital Market Line:
Depicts graphically the relationship between risk (standard deviation/volatility on the vertical axis) and the compounded rate of return (measure of return) on the horizontal axis. By plotting the risk and return (horizontal and vertical axis) of a portfolio/asset class, one can compare from its benchmark/index. Portfolios that plot in the upper northwest quadrant are considered best because they deliver the highest return with less risk when measured against its benchmark/index. Conversely, portfolios that plot in the lower southwest quadrant carry more risk for less return when measured against its benchmark(s).
A statistical measure of how two portfolios/asset classes move in relation to each other. Correlation is computed into what is known as the correlation coefficient, which ranges from -1 and +1. Perfect positive correlation (a correlation coefficient of +1) implies that both portfolios/asset classes move in lockstep, in the same direction. Alternatively, perfect negative correlation (a correlation coefficient of -1) means the two move in the opposite direction.
The ability to generate positive returns when market prices fall in reaction to a crisis event (black swan), when most long-only asset classes correlate in a falling market. Positive alpha generators can be cash, short-term Treasury bonds, gold, inverse funds, managed futures, and "safe-haven" currencies.
An actively managed portfolio that allows the manager to make trades within the portfolio without obtaining prior approval from the client for each individual trade. The client gives discretionary authority to the portfolio manager by means of the Investment/Client Management Agreement prior to opening the account.
Exchange Traded Funds (ETFs):
An ETF is similar to a mutual fund in that it holds a diversified basket of securities; but unlike a mutual fund that prices once a day at the end of the day, (called NAV), an ETF trades throughout the day in real time. ETFs have grown in popularity because of their lower expense ratios, liquidity, transparency, and tax efficiency. However, ETFs provide access to institutional grade asset classes such as commodities, currencies, real estate, international sectors, and thematic (theme) portfolios and have become popular for investors seeking broader diversification.
Exchange Trades Notes (ETNs):
An ETN has similar characteristics to an ETF, but ETNs are bonds that are backed by the credit of the issuer, rather than a portfolio of securities independent from the ETF manager. So therefore, an ETN does not represent a per unit stake in the underlying assets tracked by the benchmark. The risk is the credit risk (counterparty) of the issuer.
Using a portion of your portfolio to minimize downside risk at all times. This is accomplished through the use of volatility products. This is an asymmetrical hedge. This means that the manager does not hedge against price movement in the portfolio (traditional hedging), but hedges against panic (high volatility) in the financial markets as measured by the VIX.
Reference to popular market indexes are used to demonstrate the market environment during the report period shown. No index is a directly tradable investment.
Long/Short Directional strategies use a variety of technical overlays to determine whether to be long, inverse (short) or neutral in a particular index. They can use Long Term Tactical Analysis, Short Term Tactical Analysis, Mean Reversion Analysis, Cash Flow Analysis and many other techniques to determine the direction of a particular market segment.
The percentage drop from the highest level of equity to the subsequent lowest level (peak to trough). Also referred to as maximum loss.
Maximum Drawdown (Months):
How many months from the highest level of equity to the lowest level (peak to trough).
Months to Recover:
The total number of months from the lowest level to the previous highest level of equity. N/A means it hasn't recovered yet from its previous high. No-Load/Load-Waived Mutual Funds/No-Transaction-Funds. Mutual funds that trade at the NAV of the fund, free of commissions and transaction costs.
Relative Strength & Momentum:
These strategies utilize risk adjusted price movements to determine which market segments are currently in favor. This relies on the most simple of market phenomenon; those market segments that are in favor, will tend to stay in favor.
Measured by how close a portfolio tracks the risk and return of its benchmark. A portfolio with an R-Square of .90 means that the portfolio tracks the return and risk of its benchmark 90% of the time. Conversely, a low R-Squared portfolio will move independently to its benchmark.
The ROR determines the reward per unit of risk. The higher the ROR, the better the portfolio's historical risk-adjusted performance. It is calculated by dividing the portfolio's annualized excess return (return minus 90-day T-bill) by the standard deviation of the portfolio's annualized return. Also referred to as the Sharpe Ratio developed by William Sharpe, a Nobel Prize winner in Economic Sciences for Modern Portfolio Theory.
A statistical measure of the dispersion or variability of the return of a portfolio from the mean average. It is one measure of volatility. A lower standard deviation indicates historically less volatility when measured against its benchmark(s).
Ulcer Index (UI):
Ulcer Index is a method for measuring investment risk that addresses the real concerns of investors, unlike the widely used Standard Deviation of return. UI is a measure of depth and duration of drawdowns in prices from earlier highs. Other volatility measures treat up and down movement equally. Investors don't mind upward movement, it's the downside that causes stress and ulcers. The UI measures the depth and duration of drawdowns in price from earlier highs. The greater a drawdown in value, and the longer it takes to recover to earlier highs, the higher the UI. It is the square root of the mean of the squared percentage drawdowns in value. The squaring effect penalizes large drawdowns proportionately more than small drawdowns. The lower the UI, the fewer ulcers incurred over the time period, therefore the better the score.
Ulcer Percentage Index (UPI):
This is a better method to calculate Risk-Adjusted-Return. This metric is simply UPI = (Total Return – Risk Free Return) / Ulcer Index. This is a smarter ROR that punishes downside deviation and rewards upside deviation. The higher the UPI, the better.