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[Most investors, even many professionals, run from volatility or build walls to protect from it, seeing it as a major form of risk. Others get prepared and run to volatility with a specialized toolkit to capture alpha from it, seeing it as a major form of opportunity. This never-ending investment given of volatility has spawned a multitude of alpha generation and risk management approaches that have steadily been getting more sophisticated with modern analytics and technology to approach volatility from a different perspective. They attempt to go beyond the typical active vs passive investing mindset that most are still tethered to by uncovering more opportunities and risk management approaches than standard investment thinking allows.
To explore this more fully, I was introduced to Ryan Stever, PhD, Executive Vice President, Chief Investment Officer, and Jose Marques, PhD, Chief Executive Officer of Intech—a privately owned, quantitative asset manager dedicated to delivering a more varied and distinctive alpha creation methodology that goes beyond active and passive investing to capture what they see as an evolutionary investment model.
Talking with them about their real-world insights and unconventional, mathematics-based approaches on investing to capture diversified sources of alpha, reminded me of the stories by Peter Bernstein of the trailblazers of risk management in his book, “Against the Gods – The Remarkable Story of Risk” – that illustrated how even small evolutions in thinking and changes in perspectives can have major effects in the progression of our ability to better understand and manage risks in a volatile world.
In seeking to harness stock-price volatility to deliver unique alpha sources, they studied the best elements of both active and passive investing but also isolated not as well-known or acknowledged risks of both to engineer ways to enhance overall returns. We asked them questions to better understand their investment methodology that is creating a new narrative or paradigm for active investing.]
Hortz: Can you share with us how you developed your investment methodology and what your motivators were for looking for a more modern portfolio management approach? What general investment management challenges or obstacles were you trying to address?
Marques: Investors often face a tradeoff: passive strategies offer simplicity and broad market exposure but can lead to concentration risks in a handful of stocks. Active strategies, on the other hand, depend heavily on stock-picking—a difficult game to play consistently. Our approach bridges this gap, maintaining index exposure while going beyond the typical passive vs. active debate by leveraging portfolio-level effects that many investors overlook.
Our methodology is built on decades of research into how portfolios grow—through the interplay of stock selection with portfolio-level dynamics driven by volatility and correlations. Volatility, in particular, is not just a risk to manage—it also fuels diversification and rebalancing, which can create incremental return opportunities. At the same time, prioritizing stocks with strong fundamentals enhances the portfolio’s resilience and return potential. These two dimensions—portfolio-level effects driven by volatility and stock-level fundamentals—offer a more complete picture of portfolio growth. What’s more, we find that these dimensions complement each other. When one zigs, the other zags.
What really motivated us was recognizing that conventional active investing approaches typically miss half the picture. Our investment process integrates these insights into a systematic methodology—built on the framework of Stochastic Portfolio Theory pioneered by Intech’s founder in 1982. By combining these elements, our strategies seek to maintain broad market alignment with trusted benchmarks but aim to deliver a more consistent return profile, manage risks more effectively, and unlock a distinctive, uncorrelated alpha source that traditional approaches often overlook.
Hortz: What are the specific risks that you see need to be addressed in passive and index funds? How are you addressing them?
Stever: Passive investing offers tremendous benefits: it is simple, efficient, and cost-effective. But while indexing is a powerful tool, the way many passive indexes are constructed can create hidden risks.
Cap-weighted indexes concentrate risk by allocating more weight to the largest companies—not because of strong fundamentals, but simply due to their size. This often leads to a handful of stocks disproportionately driving returns and volatility. While this is not always apparent in stable markets, during periods of stress like recently, these top-heavy indexes can amplify downturns, undermining the diversification investors expect from broad market exposure.
Some investors turn to equal-weighted indexes to address concentration risk, but this approach may simply trade one problem for another—overexposure to smaller, more volatile stocks.
Factor-based index strategies attempt to improve upon traditional indexing by systematically weighting stocks based on characteristics like value, profitability, or momentum. However, these models apply fixed weighting rules that do not adjust to changing market conditions. Since factors are cyclical, these strategies can experience extended periods of underperformance. Additionally, as they gain popularity, crowding can dilute their effectiveness, leading to diminished returns.
At Intech, we took a different approach. Instead of relying on fixed rules that embed structural risks into an index, we actively improve diversification using volatility and correlations to balance how each stock contributes to overall portfolio risk and return. But diversification alone is not enough. When two stocks have similar volatility and correlation contributions, we prioritize the one with stronger fundamentals—companies with healthier balance sheets, better profitability, and attractive valuations.
Once we have set those weights, we systematically rebalance the portfolio, seeking to capture incremental returns from natural market fluctuations—what we call a “rebalancing premium.” This disciplined approach enhances risk-adjusted returns while maintaining the transparency and efficiency that make index investing so appealing.
In short, we have built our approach to maintain indexing’s core strengths—simplicity, efficiency, and market coverage—but thoughtfully enhance them.
Hortz: What are the specific risks or standard processes of active management that you feel need to be addressed? How are you addressing them?
Stever: Conventional active management often focuses almost entirely on stock selection—trying to pick winners, predict future performance, or time factor exposures. The problem is, history suggests this approach often leads to inconsistent results, as the S&P SPIVA studies repeatedly highlight. These inconsistencies may become even more pronounced during market stress when correlations rise, and stock selection alone may not provide sufficient diversification.
Factor-driven active strategies, while more systematic than traditional stock picking, also come with challenges. Unlike factor-based index strategies that typically follow static rules, active factor strategies seek to adjust allocations dynamically based on perceived opportunities. However, factors are inherently cyclical and attempting to time these cycles can exacerbate the feast-and-famine sequence. What’s more, factor-based active strategies may be affected by overcrowding risks just like their passive counterparts.
At Intech, we take a broader view—one that seeks to capture the full scope of how portfolios grow. Many investors—including professionals—believe fund performance is just the weighted-average sum of stock returns, but portfolio-level dynamics—volatility and correlations—also play a critical role. Our approach systematically balances risk and return contributions across holdings, aiming to maintain diversification regardless of market cycles.
Our process, rooted in Stochastic Portfolio Theory, aims to adjust portfolio weights based on volatility and correlations, helping to maintain diversification, a step that many active managers may not consider. But improved efficiency is not enough. When two stocks have similar volatility and correlation contributions, we prioritize the one with stronger fundamentals—companies with healthier balance sheets, better profitability, and attractive valuations. Then, we systematically rebalance the portfolio, seeking to capture potential trading profits from market fluctuations. This is called a rebalancing premium and it is often overlooked by conventional approaches.
Rather than making concentrated bets or attempting to time factor cycles, our approach seeks to generate multiple sources of return while staying closely aligned with market indexes. The goal is to provide a more stable and risk-aware approach to active portfolio management, offering a replacement for multi-manager arrangements or a complement to the right active manager.
Hortz: What are the overall net benefits you designed in your investment approach for investors?
Marques: First, we genuinely like indexing. It is efficient, transparent, and provides broad exposure to equity markets. But as we have discussed, we want to move beyond traditional indexing due to its limitations.
Our investment approach directly addresses these limitations without sacrificing indexing’s core strengths. We stay closely tethered to trusted benchmarks, like the S&P 500® and S&P 1000®, maintaining their valuable attributes —broad exposure, liquidity, and scalability—but we actively seek to improve upon them by harnessing volatility to better balance risk and return contributions across stocks in the index.
At the same time, our approach also seeks to improve upon conventional active strategies by combining volatility-driven diversification and systematic rebalancing with fundamentally driven stock selection. Our models prioritize high-quality companies while maintaining broad diversification. By pairing these two complementary sources—volatility-driven portfolio effects and fundamentally strong stock selection—we create what we call “Diversified Alpha.”
Ultimately, our strategies aim to offer investors the best of both worlds: the simplicity and market alignment investors expect from indexing, combined with systematic, risk-aware alpha generation. We believe investors can benefit from diversified alpha delivered through a consistent, disciplined, and systematic approach—without losing the core benefits traditional indexing and active management provides.
Hortz: Can you give us an overview of what kind of investors your strategies were designed for?
Marques: Our strategies are built for investors who want broad market exposure but also recognize the risks that come with traditional indexing—whether it is the heavy concentration in a few mega-cap stocks or the cyclicality of factor-based strategies embedded in some indices. We wanted to provide a more balanced, risk-aware approach to index investing while keeping the efficiency and familiarity of S&P/DJI benchmarks.
They follow the same systematic investment process, but different strategies apply to different segments of the market. The goal is to maintain index alignment while seeking to improve risk-adjusted returns for investors.
They are a natural fit for advisors and self-directed investors who want passive simplicity without their potential blind spots. And from a pricing perspective, we have positioned our strategies at 0.25% for large caps and 0.35% for SMID caps, placing us right between pure passive and active strategies—offering the benefits of both without the drawbacks of either.
Hortz: Can you share with advisors and asset allocators how they can deploy your investment strategy in their client portfolios?
Stever: Our strategies are designed to be flexible tools that fit different portfolios, whether an advisor is managing passive, active, or risk-managed allocations.
For core equity exposure, advisors can use our strategies as a more balanced alternative to traditional index funds. They aim to provide a more diversified, risk-aware way to track the market while staying aligned with trusted S&P® benchmarks—without added complexity or high fees.
For active portfolios, our strategies work as a diversifier. Many active managers focus on stock selection or factor tilts, which potentially introduce unintended risks. Our strategies seek to smooth out those risks by offering uncorrelated alpha from rebalancing trades—all while maintaining market exposure. This makes them a strong complement to fundamental or factor-driven active strategies.
And for all asset allocators focused on precise market coverage, using our strategies together provides seamless exposure to the full U.S. equity market—from large caps through small- and mid-caps—without unintended overlap or gaps. With our approach, investors can scale their allocations efficiently while seeking balanced risk and return contributions across market caps.
Ultimately, investors get a versatile set of tools that deliver broad market exposure, systematic diversification, and improved portfolio resilience—all in a transparent, reasonably priced package that bridges the gap between traditional passive and active strategies.
This article was originally published here and is republished on Wealthtender with permission.
About the Author
Bill Hortz
Founder Institute for Innovation Development
To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Read our editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.
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