A New Paradigm For Portfolio Risk Control

The investment markets of 2022 proved how inadequate many conventional data, analytics and risk management tools were in trying to limit the damage of a bear trend. Traditional risk management and analytical tools exposed their limits during 2022 and the continuing new market regime of sequential bull and bear markets will continue to be a hard test. We expect that the same results will be produced when the next down wave comes which is not an if, but a when. There is time to adopt advanced analytical tools though that can react faster in capturing price trend reversals.

There is a new paradigm for portfolio risk control which focuses on verifying and capturing performance dispersion across stocks which is a key recurring phenomenon. In any investment universe there are stocks in a bull trend and stocks in a bear phase. Positive and negative trends can also be found across the holdings in the majority of portfolios. The performance of a portfolio is the direct result of the combination of price trends of all the positions. When the portfolio exposure to falling stocks is high (say above 30%) then the risk of underperformance is real and obvious.

Monitoring the “trend allocation” and spotting in time a substantial weight of negative price trends is sound practice to control the risk of losses. The underlying rationale is indisputable, as price trends on individual stocks tend to persist for months and even quarters. The trends that one owns determine and dictate the performance of the overall portfolio.

So why then is it that many investors do not rigorously measure their trend allocation risk?

Because they do not have the methodology and the tools. There is though a new dimension of risk management that has been introduced that:

  • Is factual, objective, pragmatic, and logical.
  • goes to what really dictates portfolio performance – the exposure to price trends.
  • fills a knowledge gap that offers valuable insights.
  • enables an easy and fast control process of all the portfolios.
  • provides an additional angle to strengthen the investment and risk management process.

This new risk control paradigm revolves around advanced price trend analytics software that has been developed to add an element of ”trend risk control.” The advanced analytics tool enables the analysis of the “trends allocation risk” for portfolios. The larger the portfolio exposure to stocks with negative price trends, the bigger the risk of losses. It is a methodology to analyze and control risk from another perspective, as the performance of an investment strategy is directly linked to the price trends of the holdings.

Investment advisors can easily calculate the combined trend risk across all their managed portfolios, control the aggregated risk rating and promptly identify those that incorporate excessive risk, due to an overweight on securities in a bear trend, spotting in time the portfolios that require protective actions.

At Trendrating, we have been developing advanced price trend analytics and a wide range of applications for asset managers that provides a new level of market intelligence to maximize the performance of any investment strategy. We are happy to share our documented evidence of price trend analysis results and welcome further questions and inquiry.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Source: Nasdaq Inc.

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