[The current health, economic and market crisis will force all of us to re-evaluate our core assumptions and established ways of doing things. There most probably will not be a “V” shaped recovery to all things the way they were but, instead, hopefully this “perfect storm” will catapult us towards better more knowledgeable decisions and processes, as well as, improved ongoing risk protections in all areas.

As for investors, they will be forced to acknowledge the capital markets as far more complex today with “black swans” here to stay due to an increasingly global and faster-moving world. This will lead us to explore substantially more ways to effectively control losses and limit the damage to investments as an ongoing occurrence to be prepared for. This recent rapid market implosion may very well shift flows from passive to active managers that employ investment strategies and tools that offer more responsiveness to market disruptions.

To explore this further, we went to Institute member Rocco Pelligrinelli, CEO of Trendrating—a Swiss company providing advanced analytic solutions for active investment managers—who has been actively promoting this more dynamic risk management mindset. We invited him to share his firm’s experience in developing price trend capture analytics and how these systems address the growing concerns of investors.]

Bill Hortz: Why do you say that the markets today “require” advanced analytics and new investment management tools?

Rocco Pellegrinelli: We are coming from a biased experience of a bull market in equities lasting 10 years and producing gains of 325% (SP500 from 800 in 2009 to 3400 in 2019).

Problem number one is that too many investors became complacent and did not prepare for the next bear trend by resisting and missing the opportunity to strenghten their decision process and  expanding their market intelligence with the use of modern, sophisticated data and tools. 

Problem number two is the impact of ETFs—a time bomb ready to explode. As ETFs received a massive flow of redemptions, day after day, they have been forced to sell all the securities in their list. They indiscrimately  had to dump the bad as well as the good stocks, irrespective of the real economic impact of the lockdown across different sectors and companies. The result is that more than 85% of US listed stocks lost 25% or more of value in 20 days. Even in the 1987 crash it took at least two months to record such a damage.

Active managers need to adjust to increased volatility, price stampedes, and quick reversals. Risks and opportunities will emerge at a frantic pace, as we have seen recently, and reacting quickly will certainly dictate future performance.  

Advanced analytics and new generation investment management technology are required to successfully handle the more challenging market environment we face for the foreseeable future, with risk management being at the forefront. It is important to note that price trend analytics can be applied neatly into any investment methodology, acting as another layer of intelligence and an overlay on a manager’s strategy. There is no logical reason not to add this capability as a precision research tool with the nature of today’s markets.

Hortz: How did most portfolio managers handle the recent market crash? Did they managed to limit the damage?

Pellegrinelli: Using well validated investment models made a difference for some portfolio managers, limiting their downside risk. Good models are disciplined, objective, pragmatic, un-emotional and are prepared to make quick, specific actions immediately when market actions trigger them.

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