ATLANTA, Sept. 24, 2020 /PRNewswire/ — Still reeling from the earthquake in equities that was the COVID Crash and recovery, financial professionals are re-evaluating their risk analysis frameworks and remain on high alert for pandemic aftershocks.
A new White Paper (available here) by HiddenLevers, a leading tech platform in the wealth + asset management space, revisits the performance of its own risk model, drawing upon the record-breaking 2020 Covid Crash and rebound, among several historical draw downs.
Model performed well in 2020 COVID Crash
In the spring crash and summer recovery, the model correctly projected the direction and magnitude of returns for all 16 securities studied, including hospitality stocks, oil companies, tech giants, and equity and fixed income funds.
Model is accurate
HiddenLevers correctly projected direction and magnitude of returns in 95% of the 83 directly comparable cases studied, while also falling within 5% of actual historical returns in 75% of cases studied. Most of the securities chosen were initially published in our 2015 model review, preventing selection bias for the 2020 update.
Model shines in complex, divergent scenarios
HiddenLevers risk model performed well on both upside and downside outcomes, capturing macro nuances that Value-at-Risk and Monte Carlo risk models cannot begin to address. This was particularly evident in the COVID Crash and rebound, where sector impacts diverged greatly. A wide range of historical scenarios proves the risk model’s mettle, including the 2008 financial crisis, the 2014 Oil Crash, and the 2020 COVID Crash and rebound.
Covid Bungee Jump
The COVID-19 crash was among the fastest in market history, matched only by the quickness of its recovery. A 35% percent drop over 4 weeks in February and March was followed by a S+P 500 climbing back to baseline by July. The severe impact on the hospitality, travel, and energy sectors diverged greatly from the resilience of technology and online retail.
“HiddenLevers risk model separates the impact of each of its component variables, maintaining its effectiveness in unexpected environments,” said Praveen Ghanta, Founder and chief architect of the HiddenLevers risk model. “Complex scenarios like the COVID Crash, where minor economic variables played a big part, and factors moved in counter-intuitive directions – that’s where we rock.”
In the COVID Crash scenario, HiddenLevers risk model successfully projected impacts for several flagship securities, including oil producers Occidental Petroleum (OXY) and Exxon Mobile (XOM), hospitality provider Marriot International (MAR), large caps IBM and BAC, and large index funds like iShares ETF for Russell 2000 (IWM), Barclays Aggregate Bond Fund (AGG), and Fidelity Contrafund (FCNTX).
“The macro landscape during the COVID Crash and recovery has been unique – a Nasdaq WFH bounce and Fed bailouts for destroyed sectors, while energy and retail were still tanking. HiddenLevers risk model showed up in the face of peak weirdness,” said Glenn LeMoine, CFA, renowned blackswan trader and new Head of Analytics at HiddenLevers. “Advisors should know this – not all factor models are created equal.”
The remainder of 2020 offers a future that is only growing in complexity. HiddenLevers risk model is well suited to handle the right-now scenarios like Election Chaos, Nasdaq Moonshots, and COVID 2.0.
“It’s easy to drop the words stress testing into a marketing brochure. But show me how the risk model deals with pricing in the draw down as it happens,” said Raj Udeshi, HiddenLevers Founder and chief evangelist. “Show me how the model addresses the recovery or any other upside outcome, and then visualize all that for the non-quant client so they don’t panic sell. And don’t forget to translate from investment committee jargon into plain English – that’s risk analysis as client experience.”
HiddenLevers is a fintech platform engaged in digital transformation for all participants in the wealth + asset management supply chain. Multiple product lines join together to deliver solutions for investment process, business intelligence, risk analysis, executive oversight, economic research, and unparalleled client experience. Celebrating 10 years and $550 billion in platform assets, HiddenLevers remains a self-funded company, with headquarters in Atlanta.