There were many surprises for us at the start of 2020. The halt to life as we knew it, with contrary and questionable statistics, bringing the light the need for clear, reliable data. The impact to many of our portfolio companies, much of which is still unfolding, highlighting how much the manner in which a firm operates may not be obvious to investors[1]. One clear surprise for the investment community was how several investment strategies that had promised diversification or pure alpha returns transpired to correlate highly to the market.
This was not a new phenomenon, and much has been written about why investors should not be paying for beta. Yet, that seems to be what many of us may continue to be doing. What is not clear is why that is so. It may be that we do not have enough clarity about what our managers are investing in to determine if they are genuinely seeking outperformance or riding a market trend. We recently published our thoughts on the need for transparency to be provided to investors, and interested investors may find these here. Another alternative is that the strategies themselves have not been designed to deliver alpha in these unusual times. What can investors do if that is the case?
Noviscient has spent several years investing into a robust due diligence and assessment process for evaluating investment strategies at a transaction level. This granular assessment is a standard feature of our investment process and every single transaction made is put under scrutiny. This allows us to quickly identify strategies that deviate from expectation, and to course correct hand-in-hand with the portfolio managers we work with.
These investments in systematic solutions to assess and monitor trading behaviour allow us to understand the potential weaknesses in the application of a trading strategy, so that we can be alert when assumptions may not stand, or market dynamics go against the necessary conditions for success. When this occurs, we dynamically reallocate investment dollars away from these potentially less efficient strategies and towards those for whom the conditions work best. We do not have a crystal ball with which to reliably predict a market, but with increased responsiveness, we are less vulnerable when the market behaves unexpectedly.
If you would be interested in finding out more about Noviscient’s platform, contact us today.
LI: Noviscient Pure Alpha sources strategies without embedded correlations to deliver true alpha in volatile times – avoiding surprises for Accredited Investors seeking only alpha exposure.
