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Introduction
One of the most frequent questions we get from our users is how do the risk model providers differ? In this series, we ask each risk provider that has integrated with FactSet a standard set of questions. By comparing their answers to these questions about their approach to risk, the impact of the credit crisis and their opinions on model types, we hope that you gain insight into the differences among the providers: APT, Axioma, MSCI Barra, Northfield, and RSquared.
So the first point that Id like to stress is that in a world, which is, as you said, interconnected and also, in markets which are going through much quicker moves, this idea of daily data is certainly very important. Axioma very much believes in it. Its obviously a lot harder to use daily data because its harder to clean it. And you particularly have to deal with certain issues when youre dealing with global models, which well get into in a second. And Axioma is there. Axioma is the only provider that essentially re-estimates all models on a daily basis.
The second part of your question is also very important, and that is and obviously, its connected to the first one, which is does the global market matter, right now, more than it used to; and is risk or is are events in other markets affecting whats going on in other regional or local markets? And the answer is, of course, yes. But the question is not whether this is the reality. The question is how do you deal with that reality? Essentially, because what happens is, markets do not trade on a 24-hour clock; markets open and close, and obviously, the open and close of those markets affects other markets in other time zones. So when Axioma thinks about global risk, Axioma is thinking about, again, using daily data, but taking into consideration this interaction effect that is happening across markets. So, Axioma has included a proprietary trading adjustment into the model we call it Returns Timing Adjustment which takes into consideration this effect that some markets have on other markets as the trading day progresses. So, this is, again, sort of a very important characteristic that we see or has to be taken into consideration when building global models. Finally, the last point of your question is whether regional models matter. And our belief is that, indeed, they do, because although there is much more interaction across markets around the world, there is also a separation of the behavior of these markets. And probably, the most notable example is how emerging markets are behaving differently than some of the developed markets these days. And so we believe that regional models are essential, because they actually allow you to capture some of the effects that are occurring in those regional markets.
Oleg Ruban, Senior Associate of Applied Research and Patrick dOrey, Vice President and Head of Europe Equity Analytics, MCSI Barra
Oleg Ruban: Yes. We believe that, in fact, both types of models play a role because they illustrate essentially different facets of risk and, as such, they are complementary. So for example, if you think about a global model, it is building such a model, it is important to understand the main drivers of correlations between different markets. Also, these drivers of correlations will be appropriate to analyze risk over a broadly diversified portfolio; for instance, a portfolio that is invested in many countries, many different submarkets. However, if you have a portfolio that is concentrated in a single country or a region, then global factors may not be adequate enough to explain the risk and return of that portfolio. And region or country-specific factors are necessary in that case to forecast, then, attribute risk accurately. So, there is a lot of value in the additional granularity of regional and single country models.
And its also worth noting that there are different ways in which you can build a truly global risk model. So, one way, for example, is to aggregate single-country models through a set of global factors. And in this case, this model can
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provide full accuracy and detail of local models within markets, but also give consistency for risk forecast at the global level.
Patrick dOrey: Just one point from my end; I think also the key thing here is that there is never a one measure fits all. So, while, certainly, movements in global markets play a large role in driving returns, different investment strategies have different requirements. And as such, they will need suitable models that will fit that purpose.
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Our very strong view is that there is not one correct answer. There are any number of equally good different ways of decomposing risk, and it really depends on how the manager is going about constructing the portfolio, what their investment process is about in order to use a model thats appropriate.
So to give a complete specific answer to the question, you dont need to consider global markets, even if youre investing in a portfolio that you know contains multinational stocks that happen to be based in some particular market. If you do consider global factors you will, of course, get a slightly different breakdown of the overall risk. Regional risk models clearly do still play a role in risk analysis. If youre running, for example, a European portfolio or an emerging markets portfolio, it probably would be useful to use a European risk model or an emerging markets risk model to look at those things. But equally well, you could use a global risk model provided it recognized the existence of those different regions.
Part 1b: How can investor analyze risk in the emerging markets?
Next, well hear their responses to part two of our question. The emerging markets are a growing and potentially lucrative part of the market. How can investors best analyze risk in this relatively new area of interest?
Olivier dAssier, Managing Director for the EU and Asia Markets, Axioma
To put it perspective, emerging markets are about 13% of the MSCI All World Country Index [sic MSCI All Country World Index]. So, if youre using a global model to analyze that 13%, your model includes quite a lot of noise that may not be relevant for that particular asset class. With the dedicated emerging market model, you can focus on the issues that are pertinent to this asset class, and better manage your risk.
Oleg Ruban, Senior Associate of Applied Research, Patrick dOrey, Vice President and Head of Europe Equity Analytics, MSCI Barra
Oleg Ruban: So, I guess that we should start from the very beginning and highlight what is the most important thing in my mind in terms of building a risk model for emerging markets. And the most important thing here is sourcing good, clean data for this universe, and actually also, in small-cap. This is an important point because data in emerging markets tends to be quite noisy for a number of reasons. One reason, which is because data providers may not have adequate data. The other reason is because the underlying process is indeed jumpy, and the returns are quite often illiquid. This is why we, as a provider, we place a huge amount of emphasis on data collection and cleaning. And so I think we have quite a few decades of expertise of obtaining reliable data in emerging markets, as well as dealing with things like illiquid returns and jumps in currency. Also, in the single-country models that are built for emerging market countries, we always take care to choose the set of factors that is, if you like, the most appropriate for forecasting risks in that specific universe, and in that specific market. So as long as you have good data, and as long as you choose the most appropriate set of factors to explain the returns, and then these factors are also going to be the most important for forecasting the risk, I think you have a good, good balancing in terms of building a model that reflects the situation in emerging markets. Patrick dOrey: So Id add one point, and reinforce the point that Oleg made on data. It may seem almost a boring topic, but it is hugely important. And thats why we take a lot of care and invest a lot of resources into cleaning and analyzing and sourcing our data. And so the effort that we put into doing all of this data cleaning really pays off, because you end up with models that really can explain returns, and can really analyze well the sort of emerging market strategies, or any such type of investments.
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The second thing to think about is that, particularly in emerging markets, trading is important. Bid/ask spreads are large and, therefore, when assessing risk, liquidity or the lack of liquidity is an important a very important component of risk and, therefore, needs to be taken into account in the way observed returns are being analyzed. The third thing that I would do is think about how the model of risk that youre using makes the distinction between developed markets and emerging markets in terms of how the model and the security factor exposures are estimated. Typically, when youre dealing with a global model that is looking at the world in a capitalization-weighted way, the world capitalization is dominated by large multinational companies. And therefore, it is typical to estimate the factors using a capitalization-weighted scheme or a square root of capitalization-weighted scheme. On the other hand, if primarily your risk interest is in emerging markets, where many more of the influences on companies and the stronger influences are local, its often best to have a model, which is estimated on an equalweighted basis. So, it really depends on what kind of portfolio youre holding, what sort of model estimation process is apt to be best for you.
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changing very rapidly indeed, we changed that. So I think its now currently scaled to a trailing six-month exposed volatility of a global market portfolio. But that did have the effect, Im glad to say, of making the model more responsive to recent changes in market volatility, and is therefore giving quite good forecasts of short-term risk.
Oleg Ruban, Senior Associate of Applied Research and Patrick dOrey, Vice President and Head of Europe Equity Analytics, MSCI Barra
Oleg Ruban: So in one way, we havent really changed our approach that much because what the markets have started to focus on following the crisis, so things for example like looking at risk at the multiple horizons as well as having the right set of tools to look at the sales of return distributions. Well, weve been offering this kind of tools that can help you do that for quite a number of years. Now our view, which we have maintained again for a number of years, is that risk essentially is not a single number. So since the early part of this decade we have been providing long and the short versions of many of our models. By this decade, I mean of course the end of the since the end of the 90s. So this helps investors to address the issue of analyzing risk accurately at multiple horizons. And we also have a number of tools that can help investors look into the sales of the return distribution. For example, we provide the capability to run correlated [inaudible], which allow users to see the impact of simulated stress event on their portfolio in a theoretically robust way. We also have a tool for analyzing extreme risk. So weve recently released a tool called BXR, which looks at the empirical facts of distribution and provides a way of calculating the risk of extreme gains and losses in the portfolio. So we can use this kind of tool because we have a very long time series of high-frequency returns for our factors. So typically when youre going into the tail of the return distribution, the most important problem that you face is again one of adequate data, because by definition tail events dont happen all that often. So on an asset level or on a portfolio level, you may not have enough data history on its own to really understand what would happen in the tail of the distribution. But since we have a very long time series of high-frequency returns for factors, we can use that together with the kind of exposures of the portfolio to the factors, and if you like combine what we know about the tail of the factor return distribution with the current exposures to give an accurate picture of tail risk given the composition of the portfolio as it is today.
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So I think this is essentially what we think about when we think of how recent trends have changed the market perception of the way people look at risk. And weve as Ive just mentioned, again, weve been sort of advocating that people take a multi-dimension view of risk for a number of years.
Patrick Burke-dOrey : Yes. I think the bottom line really is that the market has realized that what weve been saying for many, many years is the right approach to looking at risk. So as Oleg said it, risk is not a single number. And so hence, all of the wide range of tools that weve offered for many years, theyve even before this crisis, we find that the market is now using more and more of these in conjunction. So this is really the recognition and the change. So our approach to risk analysis, if you like, hasnt changed that much. But Ill give you an example of this recent Barra Extreme Risk toolkit that Oleg has mentioned. We started researching this a few years before the crisis. We recognized that we needed to look more into the tail of the distribution. And as such, it happened that we released it in a very timely fashion when people started looking into what are the what is the impact of analyzing the tail risk so to speak. So I think really the case is any provider who can give you multiple views of risk and who can give you multiple ways of assessing and looking at what your portfolio looks like will be very much the preference of the market.
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The second thing we said when we embarked on this risk venture was that we didnt believe in this religious discussion of fundamental models versus statistical models of which one was the one that was right? Whether you should do a fundamental model or you should do a statistical model? And we thought that customers were forced to make a choice that they should not be forced to make, that actually statistical models would work well under certain environments and for certain strategies and fundamental models would work well under different market environments and different strategies.
So Axioma decided to actually provide multiple risk models, both a fundamental model as well as a statistical model as part of our platform. Again, at the time, 2005, 2006 it looked like this was not needed. It so happened and when the crisis hit, the ability of our clients to have multiple views of risk became again a great competitive advantage. Finally, and again, it would look like we really knew what the future was going to bring, we didnt at the time. We were just speculating obviously like everybody else was. We thought that this idea of transparency was crucial that when we actually did our fundamental models, we thought it was particularly important to be extremely transparent with our clients and tell them exactly what each factor meant to give them a very clear definition of how the factors were computed so that they could easily understand where risk was coming from and if risk was changing, where those changes was coming were coming from. So that was, again, essential we believe during the crisis. So to some extent has the crisis changed any of the views that Axioma has had? The answer is no. The crisis has fortified or has actually given a lot of credence to what we thought were big differentiators and big competitive advantages that our firm had.
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so well. So I think transparency is a very important aspect of risk management, it will be even more so going forward. And so I think the transparency that goes with proper scenario analysis and proper back testing of your models, were aiming to make that available to our clients.
Weve been working with what we call our short-term volatility models and that has a decay rate which typically our clients set to have a half-life of approximately 13 weeks or a quarter, that has made the models more responsive than our medium term models during the real turbulence and changeable volatility over the last couple of years. So it is important even for regulatory reasons, its important to understand how a decay rate or influence function changes the forecast.
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Part 3: Looking to the horizon length does a long time horizon still prove worthwhile?
Traditionally, time horizons in risk management were long. What impact has the credit crisis had on the use of a long horizon strategy? Do these providers believe that investors can benefit from using risk analysis over shorter or multiple time horizons?
to time, and what you really needed to think about was to was the risk structure of the portfolio based on a sort of medium- to long-horizon risk model.
One of the interesting things thats been happening in the last couple of years is weve had a number of investment managers who do have medium- to long-term horizon, wanting to look at the short-term risk structure of their portfolios with a view to avoiding being caught out, if you like, by exposures to short-term effects when they are about to undertake a rebalancing, or to invest new money, or indeed to raise money by selling things. So we now have a number of people using both a long-term model and a short-term model for when theyre going to be sort of doing trading, and theyre found that quite useful. Our kind of main business is building customized risk models that match a particular managers investment process, they could either be global models, or indeed regional models or single country models, weve built all sort. They could have different horizons, short-term, medium-term, long-term and so on. What weve tried to do with the short-term risk model thats available on FactSet is to build something that will be useful to a fairly wide range of different types of investors. The models coverage is extremely broad, I think it covers about 40,000 stocks worldwide. It tries to recognize the obvious different regions and countries around the globe, so emerging markets, the developed markets obviously, and also looks sort of industry exposure and some active factors, what some people call style factors. There is always a trade-off in this sort of exercise between building something that will be useful to a broad number of different managers on the one hand, and building something that will be most useful for a particular type of manager on the other hand. But the short-term risk model weve built, as I say, tries to cover all of the regions that people are going to invest in. It includes the most common of the style factors that people use, value, growth, liquidity, momentum and so on, and its intended to give people an idea of what their short-term risk is, up to a horizon of about one, maybe two months.
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naturally would be thinking in terms of a quarter, but perhaps like to get a handle on things, slightly even shorter time horizons than that, to those who continue to think in terms of quarters to years with our medium-term model.
Sebastin Ceria, Chief Executive Officer and Olivier dAssier, Managing Director for the EU and Asian Markets, Axioma
Sebastian Ceria: I think that investors always like to say that theyre long-term investors, unless a crisis happens and suddenly everything changes rapidly, in which case they become very, very focused on the short term. So everybody is a long-term investor as long as things are stable, and everybody becomes much more in short-term focused when there is a crisis or when there is a sudden change in the market structure. So our belief is that really long-term assessment of risk has become less relevant, people are more or our clients or our prospects are much more focused lately on what we would call medium horizon. So that is a three- to six-month horizon to estimate risk. We do believe that the bulk of the market is really looking at those kind of timeframes. They are short enough that they allow them to have that they implement rapid changes in the volatility environment, and they are long enough that it allows them to get a sense of where risk is growing, more from a long-term investor perspective. We also believe that there is a need for short-term models, that is for strategies that invest in a much shorter-term horizon, so I would say the one-month time horizon, and so we have, for some markets right now, short-term versions of those models. Olivier dAssier: You can think of it this way, the long-term or sort of long-term investors tend to think of investment horizon when they think in terms of return. So they take a long-term view on certain assets that they want to hold. But they will take tactical they will make tactical changes to their portfolios based on short-term risk changes in that portfolio. So the risk horizon, the short-term risk horizon is still very relevant to them, because they will decide to adjust that position on a tactical basis based on what is currently happening in the market, even though they may have a long-term view on the stock.
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Is one model really enough for a detailed view of risk? Do the providers believe in asset-specific models for accurate analysis of fixed income or blended portfolios?
model. On the other hand, if the goal is to have an assessment of risk across an entire enterprise that may involve multiple portfolios, multiple asset classes, some illiquid asset classes like real estate or venture capital and private equity, there is no statistically legitimate way in my view to take 50 different risk models with 50 different sets of factors and somehow try and aggregate that information together. There is just too many moving parts for such a process to be statistically stable. And as a result, you have to come up with a simpler model that allows you to describe any investment asset in the world within a limited number of factors. And generally, if youre clever, you can find ways of representing even a complex security within a relatively small number of factors.
If you took something like, lets say a corporate convertible bond issued in a foreign currency, you could think of that as a riskless bond, plus a credit default swap, plus an equity warrant, plus a currency swap. So you can take the complex security, decompose it into a series of sub-securities, which can then be analyzed in a relatively simple model and then add the pieces back together. And if you follow that paradigm, you can pretty much analyze anything in the world, from any country in the world and do so within a relatively consistent, relatively parsimonious single model.
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the fundamental model is going to capture more of the long-term risks that are present and prevalent in the market place.
So, we believe that having multiple views of risk is important and thats why Axioma does that. I mean, when you subscribe to Axioma, youre subscribing to both the fundamentals as well as the statistical risk model and this we believe is a key advantage.
Part 5a: Which risk measures work when dealing with extreme losses?
Which measures of risk they favor in the case of measuring extreme losses? The question is in two parts: First, can measures such as duration, tracking error, value at risk or conditional value at risk adequately capture the risk of extreme losses? How important is it to the various providers to have a multi-objective approach to risk measurement?
Oleg Ruban, Senior Associate of Applied Research and Patrick DOrey, Vice President and Head of Europe Equity Analytics, MSCI Barra
Oleg Ruban: So it is very important to realize that volatility is a complete measure of risk only if returns are normally distributed. As we know from a wide range of academic evidence as well as work that weve done internally at MSCI Barra that this is not the case, and therefore there is a clear need to beyond volatility in risk analysis. And there are number of ways you can do this, and the measures that you highlighted here, such as obvious risk, conditional value at risk, especially the latter, can be definitely used to analyze the tails of the return distribution. But also an important thing to highlight here is differences between measures and the distribution, so its not that the measures that have been used in the past are necessarily inaccurate. So things like obvious risk and conditional value at risk may definitely have their place in portfolio construction and risk management. But even more important is: what is the methodology you use to compute this measure? So if in computing this measure, you still rely on the assumption that your returns are normally distributed, then that is not very good. You need to accurately its like the empirical distribution of your return, when you are computing any measures, any risk measures in fact. Patrick dOrey: To add to that, one, just to add one point here, that this, I think, is a very key part because of, there has been a lot of talk around the measures, but not enough talk around how these measures are calculated. So the much maligned VaR for example, there is nothing wrong with VaR per se, but VaR, if you assume that your underlying returns have a normal distribution or follow a normal distribution, then that VaR number isnt going to tell you much. And the same thing goes for the conditional value at risk. So the key thing here though is what we have been able to do is to not only look at these distributions as they are, so without fitting some theoretical distribution around it, but also to decompose these measures, because its very important that you dont just have a single top line measure. You got to identify the causes of it.
Sebastian Ceria, Chief Executive Officer and Olivier dAssier, Managing Director for the EU and Asia Markets, Axioma
Sebastian Ceria: So first, again, lets answer this question from a point of view of equities. When the crisis happened, we were already working with an approach to deal with measures, risk measures that take into consideration the downside risk more than just variance, which is the measure or tracking error which is the measure that we use for our
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equity portfolios. Our experience has been that over the last year, after the crisis our clients and prospects have become a lot less focused on that, and they believe that the world is moving towards a more normal environment where looking at extreme risk for straight equities is not as important.
Now the question becomes very different if you start having securities in your portfolio that naturally have asymmetrical returns, for example, options. So if you hold options, then obviously the traditional measures of tracking error are not enough because theyre not going to be able to capture the asymmetric nature of the return of non-linear instruments such as options. It is also important to note that for options, for example, delta approximations, which is what most providers do, is just not enough. So when you have options, we believe that these downside risk measures become very relevant, and Axioma is right now working on an approach to actually model these exactly without relying on delta approximations. And this is something that will be available later this year. Olivier dAssier:I think its important also to remember that there is a difference between being able to measure something and been able to manage it afterwards. So what Axioma is trying to do is not only provide a method in our risk models to be able to accurately measure the risk of an equity portfolio that includes non-linear assets such as options, but also to be able to use the ability to manage that risk by having that methodology incorporated in our optimization and our portfolio rebalancing tools, to so that they can actually be properly and exactly hedged if thats the desire of the manager. Sebastian Ceria: Yeah, so just to reiterate the point that Olivier made, thats a very, very important and good point is: we kind of separate measurement from managing. I mean if you can measure but you do not manage, then youre in trouble. You want to measure but you also want to be able to correct if what you measure is not the desired quantity or the desired level of risk that you actually want to have. So thats why at Axioma, we believe that its important whenever you come out with something that allows you to measure to also come up with something that allows you to manage or optimize that particular portfolio with those securities.
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Part 5b: Do you favor fat tails, MCVaR, etc., or do you favor a traditional exposure led approach to risk?
The next part of our question: at a recent FactSet-hosted event, our users split into two camps. Those that favored modeling measures such as fat tails and Monte Carlo VaR and those favoring a traditional exposure led approach to risk. Which do you favor?
Sebastian Ceria, Chief Executive Officer and Olivier dAssier, Axioma Managing Director for the EU and Asian Markets, Axioma
Sebastian Ceria: We believe that that very much depends on the instruments that you hold in your portfolio. If you hold the portfolio of straight equities, we believe that the right approach is the second one, the exposure-based approach. If you hold the portfolio that has equities and options or equities and instruments that have non-linear
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payoffs, we believe that downside risk measures is what is appropriate. So it has more to do with the kinds of instruments that you hold in your portfolio, more I believe than the risk environment, because the risk environments are temporary, and you cannot, you have to be very careful that you cannot necessarily change your risk measure because something is happening in the market. I mean investors dont like that. You want to have risk measures that are consistent regardless of the environment you have.
Olivier dAssier: And to add to Sebastians point, we believe that risk management isnt a one-size-fits-all a type of practice; its a discipline where you have to find a one size that fits just you. So our goal is to provide investors with solutions that are extremely flexible so that they can chose the one model and the one method that best represents their investment process and sources of risk that they have in their portfolios.
how big they are and how big they are in relation to each other, the extent to which they correlate to or diversify each other, and so on.
And only then can you really start to manage the risk inside the portfolio, which of course is what Ben Graham said Investor Relations was all about. So therefore I favor an approach to risk measurement which enables managers to do risk management, which therefore means using some sort of factor model, so as you can see the actual bets that youre making inside the portfolio.
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Our last question in series; whats the competitive advantage? With user choice expanding in the market, what makes Axioma stand out from Barra? Or APT or R-Squared distinguish itself from Northfield?
Sebastin Ceria, Chief Executive Officer and Olivier dAssier, Managing Director for the EU and Asia Markets, Axioma
Sebastian Ceria: I think weve touched upon most of those points during this discussion, and I would reiterate that the ability to daily re-estimate models is essential in this marketplace. Axioma is the only provider that has multiple models that are re-estimated daily across the globe and are released many hours before the respective local market opens. So not only [inaudible] to re-estimate models on a daily basis, we also believe it is important to provide those models significantly ahead of the market open so that portfolio managers and traders can actually make their respective decisions before those market opens and they need to trade on those decisions that theyve made. So, obviously, daily re-estimation of all elements of the risk model for covariance matrix, specific risk exposures, we believe its crucial for any end user of risk models today. The second one is this notion that it is important to have multiple views of risk. And multiple views of risk is not just different horizons but its also to have both a fundamental and a statistical view of risk because they capture different phenomenon that is going on in the market. We are big believers in having regional models and focus models that address the idiosyncrasies of particular markets. We are big believers in transparency and this is a big distinguishing factor. We dont think that factor models have to have factors that have, you know, hundreds or tens of descriptors that are combined with very unique and secret formulas. We believe that clients demand transparency and risk providers should provide that transparency. Those are some of the advantages we believe that our risk model have with respect to our competition and why the users of FactSet should consider Axioma, even if there is already other established providers that are part of the FactSet platform. Finally, we do believe that it is very important to think about risk in conjunction with how that risk measurement is going to be used to manage your portfolio. Axioma is again a big believer in the interaction of risk and portfolio construction, risk and optimization, and thats why later this year Axiomas Optimizer will be also be available in the FactSet platform. The Axioma Optimizer has some unique features like the Alpha Factor Method that corrects for risk under-estimation in optimized portfolios that actually make use of phenomena that we observed of how risk models interact with optimizers. So those are some of the differentiating factors that we believe makes Axioma unique. Obviously, all of these factors come together with the observation that Axioma is a firm that is innovating in this space Axiomas principles are one of great innovation, advancing the state-of-the-art, recognizing that the markets are changing, and risk providers have to change and continuously innovate. Axioma is a culture of flexibility, we want to give you the flexibility to do what you want to do, we dont want to impose a particular view on the client. And finally, a culture of client services. We think that clients deserve and demand a very dedicated client service of people that really understand whats going on in the marketplace
Olivier dAssier: The difference of Axioma is that from most other vendors, if not all is that we do not believe that the measurement of risk, the rebalancing or constructing of a portfolio and the estimation of returns for this portfolio are separate practices, they are disciplines that all come together in one in the portfolio management process, and we want to build solutions that incorporate this interaction among those three pieces.
mention things like the long- and short-term models, the single country, regional, and global models. We have specialty models, and in some case we do provide small cap models, for example. So this range of tools is very important for being able to analyze risk in each particular circumstance.
The second key point is data. Its something that weve already mentioned, that data plays a huge role in accurately forecasting risk and accurately giving good measures and good insights analyzing the portfolio. So without this you really cant do anything. The third key point is our research. So we have multiple different types of publications, we have constant research bulletins. For example, my colleague Oleg here is one of the authors of many such bulletins, which offer insights into very different types of and recent types of market events, and will analyze and understand the market And finally, its the framework in which we can bring all of this together. So, not only can we analyze these individual markets, sectors, different investment types, but we can bring all of this information together. And an example was our integrated model, when we had the discussion on bringing equity and fixed income together. Its hugely important that we can analyze this. But also, when were looking at these multiple views of risk, it is important that we can analyze them across a very consistent framework. So when we mention things like volatility, we decompose that along a series of factors and the factors that investors care about and understand. And but also we do this with other measures. So when were analyzing tail risk, we dont just give you a conditional [inaudible] or expected shortfall number or what we do is we actually decompose and attribute this number to the underlying forces of risk and return of a portfolio. And all of these are very consistent. So in the same way that we can analyze and decompose volatility, we can do the same thing for tail measures and we can do the same thing along stress testing scenario analysis.
Conclusions
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