In the wake of the Great Recession, much was written in the industry press and elsewhere about the failure of traditional tools and techniques advisors use to mitigate risk. Buying and holding a diversified portfolio didn't work very well; just about all asset classes fell in unison. Many critics contended that the Monte Carlo models used by advisors underestimated either the likelihood or the severity of a black swan event.
As a result of their recent experiences, advisors have been re-examining their long-held investment approaches. Many have concluded that a buy-and-hold strategy is no longer advisable. But those who previously held to the buy-and-hold philosophy are loath to be viewed as "traders" or "market timers." Rather than trading on short-term market gyrations, these advisors look for longer term trends they can exploit. This might be as simple as overweighting asset classes they view as undervalued and underweighting those they perceive as overvalued.
A significant number of advisors are giving more weight to intermediate and long-term economic trends as well. This is something institutional investors have done for years, but it is a relatively new phenomenon within the advisor community.
Econometric data can be used for two different and sometimes opposing reasons: Investors can use it to actively seek investment opportunity. They can also use it defensively as a risk management tool. Large institutions that have had access to econometric tools for years use them for both reasons. These tools typically start at hundreds of thousands of dollars and can go up to millions, which puts them out of the reach of advisory firms. Recently, though, a number of new technology products have been launched offering quality econometric tools at reasonable prices. One of the more ambitious of these new products is Hidden Levers (www.hiddenlevers.com), now in beta testing.
Hidden Levers is a financial technology company based in New York City. Their goal is to reveal the hidden links (or levers) between the economy and an investment portfolio. Hidden Levers does this by allowing advisors to create economic scenarios in order to gauge their impact on a given investment portfolio. The data can also be used to determine what investments are likely to perform best under a given scenario.
The founders of Hidden Levers, Praveen Ghanta and Raj Udeshi, know a thing or two about economics, trading and technology. Ghanta is a graduate of MIT, with bachelor's degrees in computer science and economics, and a master's degree in computer science. He has built credit derivatives and risk management systems for Deutsche Bank and participated in other econometric projects. Udeshi has a background in emerging markets sales and trading, as well as interest rate swaps, foreign exchange, inflation-linked bond swaps and foreign exchange options. Udeshi was previously a founding member of Xolia, a fin-tech startup whose decision-making technology helped users choose the right online broker, life insurance policy and credit card for their needs.
An Overview Of The Software
Hidden Levers is a Web-based financial technology platform that offers a great deal of functionality, but broadly speaking, it can be divided into two types of tools: those for research and those for risk management. The research tools will appeal primarily to stock pickers, but it can be useful to other people, too. For example, if you are running a core/satellite portfolio strategy, you might use the research section to develop ideas for the satellite portfolio.
Within the research portion of the application, you find the "Macro Strategies List." The list contains macroeconomic ideas that the Hidden Levers team is currently following. When I logged on in mid-April, these included such topics as: "Japan Recovery Plays," "Long Oil Plays," "Long Gold Plays," "Rising Retail Sales Plays," "Short Dollar Plays" and "Short Euro Plays." For the commodities and currencies, an information box contained the one-year price trend for the commodity, as well as investments that could capitalize on a scenario.
In the Japan recovery, there is no "trend" to track, but there are recommended investments. Not surprisingly, one of those was the Ultra MSCI Japan Pro Shares (EZJ) a leveraged ETF designed to replicate twice the daily performance of the MSCI Japan index. Some of the other recommendations-including a Japanese Internet service provider, a credit services firm and a semiconductor firm-might not be so intuitive, however.
Hidden Levers allows advisors to create their own scenarios, too. One method is to click the "more ideas like this" link under a scenario. So, for example, if you want to use the screen Hidden Levers used for the long gold scenario, but apply it to agricultural commodities, you would select the more ideas link under "long gold."