Practical Application for Fundamental Hedge Funds
In a recent webinar co-hosted by MSCI and Equity Data Science (EDS), experts from the investment management industry, including EDS client Chris Greenfield, Head of Trading at Broad Bay Capital, Benjamin Lieblich, Chief Data Scientist at EDS, and Mark Carver, Managing Director at MSCI, gathered to discuss current market conditions, investment strategies, and the importance of risk management. Watch the video for real-life examples of how hedge funds and asset managers successfully leverage risk management solutions in their investment workflows. Some notable insights from the webinar also below.
At the 12:30 mark, Chris Greenfield shared Broad Bay Capital’s approach to integrating risk management into their investment process. The firm is a bottoms up long, short fundamental hedge fund who has brought risk and factor monitoring directly to the investment team. They had a lot of unintended exposures that were a bit of a drag on P&L, including value out-performance or momentum drawdowns, and needed to view where the crux of their volatility and risk were being driven from. By leveraging tools from EDS, integrated with data such as MSCI models, they improved their portfolio’s idiosyncratic risk exposure, enhancing performance and reducing unintended factor risks. For example, their ratio of idiosyncratic risk (alpha) vs non-idiosyncratic risk went from 60/40 to 85/15 and almost as high as 90/10 at some points, emphasizing the point that having a better understanding of what was driving their risk and how to manage exposure, whether it was hedging with baskets or using different sizing methodology to drive the idiosyncratic exposure within their portfolio.
Importance of Risk Management
The discussion underscored the shift in risk management from a middle-office function to a front-office necessity. Understanding and managing risk exposures within portfolios is crucial for achieving desired investment outcomes. Carver stressed the value of using portfolio analytics to decode risk and return, helping investors make informed capital allocation decisions
Advanced Portfolio Analytics
At 14:30, Benjamin Lieblich demonstrated the capabilities of the EDS platform, showcasing how it helps fund managers analyze risk decomposition, optimize portfolios and manage factor exposures. The platform’s flexibility allows for tailored solutions, enabling clients to incorporate various data sets and models to suit their investment strategies.
Other Key Insights
Mark Carver highlighted the current market’s macro sensitivity, with central bank policies significantly influencing market movements. He noted two primary characteristics of today’s market: concentration and style divergence. Investment concentration remains high, with the top ten names in the U.S. market accounting for nearly a third of the MSCI USA index. Additionally, investment styles are diverging across different markets, presenting new diversification opportunities for investors.
Carver provided a performance overview, noting that global equities are up by about 10.5% year-to-date, with U.S. equities just under 12%. However, he emphasized the challenges posed by market concentration, where a small number of stocks dominate returns and risks, making it difficult for active managers to navigate.
56 minute video
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