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Posts Tagged ‘dynamic asset allocation’

How we see ourselves …

Monday, May 17th, 2010

Covert Analytics is a different product. We hope that is obvious when you see our product for the first time, the ease by which our product gives you insightful results and analysis, and how our simple approach beats buy and hold and is the product you wish you had access to before the market crash! OK maybe not all those things, but we do hope it is a different product for you.

We cannot help but identify with another market leader, albeit in consumer electronics. And this is how we see ourselves:

Apple redefined consumer electronics, and we hope to redefine asset allocation. Our aim is not to be the most intelligent group of software developers and market practitioners, but instead the most easy to use product, that delivers the most benefits, and is one part of your business that is a stress reliever, and not a stress provider.

Sincerely,

The Covert Analytics Team

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The Importance of Covert Analytics to Your Firm

Monday, May 17th, 2010

As a dedicated software provider for the investment management industry, one of our top priorities is to educate. We do not educate to pitch our software but to educate the marketplace about our approach, which we think will definitively and sustainably improve any portfolio manager’s practice.

The recent black swans that have dominated the news have caused understandable fright among many investors and coinciding with that is a rise in apprehension among their money managers. Why is this? Because recent events are a reminder that the raging bull since March 2009 will finally be met with a formidable adversary: volatility. Vol is back. The past few weeks have brought about known risks: sovereign default risk, investor panic, wild currency swings and unknown risks such as the BP oil spill, Iceland’s volcanic ash, the US intra day market crash, etc.

There has never been a better time for an approach like ours. We think that the key differentiating factor of our software is that it was built by market practitioners, and not under the cozy umbrella of academia. A good analogy of this is being street smart versus books smart. Though the books smart guy may have the better degree and vocabulary, the one that is going to get you through the tough part of town safely is the street smart guy.

Covert Analytics is the streets smart guy. To borrow a saying from Eastern philosophy, “the best defense is a good offense”, and this is precisely what we aim to provide our clients. Our clients, again, are fancy hedge fund managers and simple fee based money managers in Ohio. The punchline we give potential clients is, for sure our market modelling is not the black box solution to solve your portfolio management process issues, but we are however a software that will help you (the money manager) sleep better at night.

The diagram below displays what we call the “Four Cornerstones of Portfolio Management” … as you will note we believe Covert Analytics touches each aspect of this four cornerstone approach.

 

1) Client Profile – this is set forth by our users when they specify the “focus” of the portfolio along with the target range. As you will note this is a no frills approach to “client specification” … as a bunch of other less relevant details can be included, however we think any advisor will agree these are the key questions to answer.

2) Asset Allocation – any user of our approach will benefit from the Covert Technique to asset allocation, by which markets are selected, quantitative risk indicators are built per market and a dynamic asset allocation (fully backtest-able) mode is constructed.

3) Security Selection – typically this would include a fund manager screening tool, however since our model allocates  to stock and bond markets along with commodity baskets, we would urge clients to view markets the same way. Top priority is picking the market and a distant second (on the priority list) is finding the vehicle.

4) Rebalancing & Monitoring – Covert Analytics emphasizes constant rebalancing as new data is incorporated into your model. The monitoring service allows you to keep a better eye on your models and the portfolios based on those models.

We hope you will see why we think our software is a great offense for any portfolio management, investment advisory or hedge fund shop. Please contact us if you have any questions.

Sincerely,

 

The Covert Analytics Team

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Suggestion for CALPERS

Friday, March 19th, 2010

We agree with the Wall Street Journal article, implying that serious investors need to rethink asset allocation. It goes without saying that an asset allocation strategy “works” over the long run, but that doesnt help navigate through ferocious bear markets.

“In their research, managers came across Denmark’s ATP fund. In 2008, that $112 billion pension fund moved from allocating investments based on asset type to what drives risk, a spokesman confirms. For example, it put private and public equities into one category called corporate earnings, which usually perform badly during economic downturns.”

That is exactly how Covert Analytics suggests portfolio managers manage portfolios! Allocating investments based on what drives risk? That is the exact definition of what our platform is trying to achieve!!!

Suggestion: CALPERS can fire all their employees (except 2), hedge funds, advisors. Maintain one employee to manage their Covert Analytics subscription and other employee to execute trades! Problem solved.

Here is the link to the WSJ article

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Remarks from a hedge fund god

Wednesday, March 17th, 2010

Ed Thorp, not only a leading thinker on markets and investing, but also one of the most successful hedge fund managers out there was quoted a few years back regarding trade idea generation and how money managers need to evolve. It is a great quote and should lead anyone in the business to refocus on the essentials:

“Where do the ideas come from? Mine come from sitting and thinking, academic journals, general and financial reading, networking and discussions with other people.

In each of our three examples (blackjack, convertible bonds, statistical arbitrage), the market was inefficient and the inefficiency or mispricing tended to diminish somewhat, but gradually over many years. Competition tends to drive down returns, so continuous research and development is advisable. In the words of Leroy Satchel Paige, “Dont look back. Something might be gaining on you.”

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The Covert Analytics Trinity

Saturday, January 30th, 2010

These are three integral components of the Covert Analytics approach, what we call our Trinity!

Here is a description of these components:

Gut feeling: We believe that the best money managers have a certain amount of experience, that translates into a “gut feeling” of the market. A deeper sense as to what drives the market’s up and down moves that does not vacillate depending on what the headlines say is causing markets to gyrate. It always amuses us when we see Bloomberg headlines that explain that “the market is up today because of X” and then subsequent day to see the market down and to have a headline that reads “X continues to disappoint, thus leading the market lower”. Gut feeling allows you to over write the noise. It allows you to have a grasp of what the market is going to do, how you will react if it unfolds and how you will manage your risk if it does not.

Systematic approach: This term refers to having a disciplined approach to investing, usually applied to ‘systematic hedge funds’. A systematic hedge fund is a concept that explains the investment style of the fund, where a system is in place to trade markets irregardless of the hedge fund manager’s input. The opposite of this is a discretionary approach, ie one where the hedge fund manager makes all investment calls for the fund on an “ad hoc basis”. We do not advocate that any investment advisor adopt a black box style approach to investing, which is what the majority of systematic hedge funds employ. What we strongly advocate however is that having a systematic approach which helps you maintain a framework across booms and busts, across bull markets and bear markets, will help you achieve greater returns over the long run by avoiding common pitfalls of investor emotions.

Global macro focus: Again this is a hedge fund term, but really applies more on the markets traded than anything else. The best global macro hedge fund managers (Paul Tudor Jones of Tudor Investment Corp, or Bruce Kovner of Caxton Associates) make the majority of their investment calls on broad market moves (ie where is the S&P going, how Crude, Gold is going to trade, where the Euro is headed) and typically abstain from “I like Dell over Microsoft” type calls. It is an emphasis on global capital flows and making money on stock, bond and commodity markets across the world. They benefit from the fact that usually “there is a bull market somewhere”. So not only is this a regional de-emphasis (ie go global), it is a security type definition as well (broad market indexes).

Covert Analytics is a software platform that was developed to allow investment advisors combine these three key paradigms into one successful money management platform. Our asset allocation software was designed to allow you to combine your gut feeling, with a systematic approach (that you custom tailor), and to have a global macro focus (rather than just simply allocating to US stocks, US bonds, and Cash).

The Covert Analytics Team

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Great quote from a NY hedgie

Wednesday, January 20th, 2010
Was speaking to a NY based event driven hedge fund manager yesterday, and he had a great quote:

“Investing is 70% instinct, and 30% homework”

This is no small time hedgie either. He is the founding partner of a $2 billion event driven hedge fund. Reminds us of a great quote from one of our favorite investors, Marc Faber:

“Investing has a lot to do with common sense and personal observations”

We built Covert Analytics to allow investment advisors and portfolio managers to input their views across global capital markets. The framework we initially conceptualized would allow investors to apply a logical methodology to evaluate a varied group of assets, and to see how this methodology would have worked historically.

Here is how we see our platform “mixing” with our great quote:

Your views, our platform

Covert Analytics is a platform, that combined with your views, produces information that helps drive your portfolio management process

Our plaftorm + Your Views = Input for your PM Process

Our platform is not a black box which tells you how to allocate. Our software allows you to input market specific views without the traditional academic mumbo jumbo of forecasting market returns or standard deviations, but instead allows you to build and combine indicators which are consistent with your views. Our proprietary backtest methodology allows you to evaluate how your asset allocation model performs historically, factoring in the portfolio guidelines you set forth, and proposes a recommended asset allocation.

Covert Analytics is a platform which allows you to build dynamic, quantitative asset allocation models that are driven by your expertise, and your views. We are glad our hedgie friend said that, because we could not have agreed more!

The Covert Analytics Team

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Start asking the right questions

Friday, January 15th, 2010

As an investment advisor you are primarily responsible for 1) having a view on the markets and 2) how to position your portfolios (given their unique constraints) according to those views.  Too often more attention is paid to the vehicles used to implement those decisions. In other words, rather than spending the bulk of your time deciding how much to allocate to Equities, you spend the bulk of your time picking Equity fund managers.

The article below is a perfect example of this.  Though it is a good article, from the Financial Times Fund Management section, it should not be groundbreaking news to investment advisors. It should be met with a shrug of the shoulders.

The wrong question still has a good answer!

Too often outperforming Equity managers still cost portfolios to suffer substantial drawdowns in a bear market. Too often the best bond fund outperforms its benchmark by 300 bps annually during a market cycle that saw Equities double.  You see where this is going? Start asking the right questions:

In general, here is our view …

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How we view market risk

Friday, January 8th, 2010

Risk is alot like rain, and your asset allocation is alot like an umbrella.  Your portfolio (you) always seem to get wet on your feet and the bottom part of your legs, right? Thats because the part of your body most exposed to the rain is your “risk assets” such as Equities and Commodities. These are the more volatile assets which though they have the best chance of giving your portfolio a substantial boost are also the most exposed when “the bear comes a-knocking”. The dry, upper part of your body? Thats the Bonds and Cash in your portfolio. Much more protected from the rain and thus less susceptible to market swings.

Risk and the Umbrella

 Covert Analytics aims to be your bigger umbrella! 

Covert Analytics = less risk

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Understanding the concept of risk indexes

Monday, December 28th, 2009

When attempting to explain our approach to clients, we like to revert to simple to understand examples.  Our whole approach builds on “risk indexes” created per market. The markets we focus on – and to which our dynamic asset allocation methodology allocates – is to the major global stock and bond markets, as well as Commodities. To each of these markets we focus on creating risk indexes which identify not when markets are a “good buy” or a “strong sell” but instead attempt to identifywhat the major structural forces that impact asset markets are saying. 

It is similar to the temperature gauge in your car. When driving, you want to see the temperature gauge ”right in the middle”. In other words, not too hot and not too cold.

Our risk indexes function in a similar way. The combination of indexes create cyclical indexes which evaluate when markets are “high risk”, “low risk” or in “equilibrium”.

“Right in the middle” for our indexes would describe an equilibrium state. A high risk index reading (essentialy a combination of indicators that are 1 standard deviation or more away from their mean) implies that markets are “at risk” of a correction. The size of the correction is determind by how “high octane” the market is of course.  A high risk index reading for US bonds would imply a much smaller correction than a high risk index reading for US stocks.  A low risk index reading implies that structural forces are pointing to a positive environment for the market. In other words, the market is a “low risk buy”.  This does not imply that markets are immediately ripe for a bull market, but it does imply that the combination of indicators selected point to substantially higher market values from the current readings.

We hope you enjoy reading our blog. Please note: Our web application is set to be launched towards the final weeks of January. We are currently in the final stages of development. Our platform will be an invaluable tool for any portfolio manager and we are so excited that you are a part of it.

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Using a quantitative approach

Wednesday, December 23rd, 2009

A quantitative approach does not necessarily imply a black box. We like quantitative approaches because they help us remove the subjectivity of markets.  Granted it helps that we like math:

But we do not recommend a blind, mathematical approach to investing.  Covert Analytics is a program that allows portfolio managers to combine personal market views on technical signals, economic data, valuation, liquidity measures etc and to combine these measures into one unified approach. This unified approach allows portfolio managers to evaluate multiple markets in a similar fashion, thus removing the noise and hysteria, the bullishness and the bearishness, and to “stick to the plan”.

As a side note, we wanted to point out that following quantitative rules is something you already do. An odometer is a quantitative tool, it removes the subjectivity of speed measurement and tells you how fast your car is going. You dont leave it up to gut feeling do you? When the officer pulls you over would you say “I wasnt looking at my odometer, I thought I was going around 38 mph!” 

What about measuring your blood pressure? If your doctor were to tell you “I think your blood pressure is X” you would not think it was a sufficient measurement, would you? The concept here is that interpreting tons of variables as most portfolio managers have to do is a very difficult task. Breaking it down into quantifiable signals that can be easily digested, interpreted and combined into one cohesive measurement is what Covert Analytics is all about. Simply tracking a few measures (say 5) per market for an Equity portfolio allocated to the G7 is 45 variables!

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