Opportunistic Allocations Using Multiple Frameworks

by | Feb 5, 2020

This is a case study demonstrating how investors integrate their own views with ClearMacro investment frameworks in order to generate alpha.

The Case: Going Overweight the US High Yield Energy Sector in 2016.

 

Summary

  • Performance: generated 45% net gain and 34% alpha over 15 months.
  • Conviction: dynamic, mapped to frameworks.
  • Differentiation: integrates outputs of multiple frameworks across multiple investment horizons and analytical approaches. Provided an anchor against negative media and analyst views on oil.
  • How: constructing a framework that allocates dynamically to an opportunity based on the real-time alignment of investor view / multiple ClearMacro frameworks, drawing on 500 signals and 5 million+ data points

 

How is our approach different?

Most investors apply a single decision lens to their preferred investment horizon.  At ClearMacro, we enable investors to benchmark their own views against multiple lenses in order to generate more consistent alpha.

 

Why should investors care?

Being able to instantly reconcile robust multi-horizon investment frameworks, tailored to each asset class, with the most relevant data sets sourced and cleaned, is a major source of efficiency gain to our clients.

Diversifying your portfolio holdings may be the only free lunch, but we believe that diversification of insights is equally important.  No one data set, signal, or analytical model works perfectly all the time, so we believe that calibrating conviction and capital allocation to the alignment of insights from different and diversifying investment frameworks generates higher quality and more consistent alpha.

 

An Example

In January 2016, a ClearMacro user was convinced, based on their own research, that after a prolonged and major sell-off in the price of oil, there was a strong probability that it would plateau and bounce from the then price of $30.  At the same time, they saw that ClearMacro’s tactical valuation signal for oil had suddenly spiked into the buy zone.

Figure 1: Signal Insight: ClearMacro signals highlight the return insights generated by specific information categories, such as valuation

But when the user clicked on the Long-Term Returns module (available through our analytics platform – ClearENGINE), to extract the long-term return estimate for an allocation to crude oil futures, they would have been disappointed that annualised return prospects were only 4% (though this was much higher than previously), and that adjusted for price volatility, the estimated Sharpe Ratio was only 0.16.

An aside: our long-term return framework estimates risk-adjusted return prospects over the next 3 to 5+ years by aggregating growth, income and value factors.

Investigating further, the user then looked to see whether the value opportunity in oil could be better exploited in other, correlated assets.  First, they looked at the US energy equity sector, where the ClearENGINE estimated returns of 10%, and a Sharpe Ratio of 0.7.  Not bad, but in the US High Yield Energy Sector, they noticed that annualised return prospects had spiked to 15%+, with a Sharpe Ratio of around 1.2.

Figure 2: Returns Insight: ClearMacro frameworks estimates annualised returns over a target horizon – below for a long-term allocation to a basket of US HY Energy credits

At this point, the user would have become very interested in making an opportunistic allocation to a basket of US HY Energy credits, but was understandably nervous about an exposure, given the negative financial media around energy-related assets. To mitigate these concerns, they were able to build a structured and transparent risk management framework that integrated their own view with the full suite of ClearMacro investment frameworks.

 

How did this work in practice?

Having identified the opportunity at the beginning of January 2016, the user was able to dynamically articulate an allocation conviction level based on the return conclusions at each point in time across 5 independent frameworks:

  • User’s Own Views: bullish / bearish / neutral.
  • ClearMacro Long-Term Rating: return prospects over next 3-5+ years
  • ClearMacro Medium-Term Rating: return prospects over next 6-12+ months
  • ClearMacro Short-Term Rating: return prospects over 0-6 months
  • ClearMacro Systematic Directional Model Output: systematically optimised from ClearMacro signals, long / short tactical directional model for the correlated asset, in this case oil prices.

 

How did it benefit investors?

By allocating an equal weight to the output of each of these 5 frameworks, the user was able to construct an allocation framework that could articulate at any point in time a conviction level for the allocation that he could then dynamically map to risk exposure (a diversified basket of US HY Energy corporate credits).

Figure 3: The combination of user judgment and systematic, objective framework conclusions drive the size of the opportunistic allocation as they align / diverge. 

Using this framework, the user would have realised a net gain of 45% and an alpha of 34% over 15 months.

 Figure 4: Performance Tracker: HY Energy opportunistic allocation

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