The Need for Better Market Intelligence for Active Equity Managers

[Our guest article explores the perennial challenge of active managers in capturing alpha and beating their benchmarks and passive performance. Rocco Pellegrinelli, Founder & CEO of Trendrating – a Swiss-based company providing advanced alpha discovery and price trend analytic research solutions – has been dedicated in his capacity as a performance management partner for investment managers by building his Trendrating advanced analytics investment research platform with modern AI technology and dynamic market intelligence capabilities.

We invited him to share his first-hand industry knowledge on building modern research tools and his firm’s experience in enabling alpha and trend capture in a simple, systematic, and transparent way to add performance value consistently over time to all equity investment strategies. This area may well be creating a new dynamic paradigm for active management.]

The Need for Better Market Intelligence for Active Equity Managers by Rocco Pellegrinelli, CEO, Trendrating

Professional investment managers need and deserve better market intelligence in equity markets where price movements and trends are driven by a multitude and wide variety of factors.

I say this based on how SPIVA, Alpha Architects, and many other performance analysis reports have chronicled how a large cross-section of equity investment managers have been challenged to beat their benchmarks on a consistent basis. I fear that conventional data and tools are inadequate for today’s managers where the key is finding the facts that really have an impact on alpha. Investors need efficient fact finding and better market intelligence.

It is wise to explore advanced investment technology that makes it possible to discover what works and what does not in a dynamically changing equity marketplace, with robust evidence and validation. This discovery power is the key to performance. True understanding of fundamental and price trend dynamics opens up a whole new world of knowledge and decision-making.

I believe the most strategic element to discover, which goes beyond price trend intelligence, is alpha discovery. The possibility to test and assess the value of any fundamental parameters in selecting stocks, and across a statistically significant sample, can be enlightening. The ability to update original fundamental assumptions and explore different combinations of rules and compare historical performance can offer a wise, sound information framework, based on facts rather than hypotheses or habits.

Amongst the findings we see in this discovery are:

• Different markets and different sectors may reward distinct fundamental rules. What works for one sector may not work for another.
• Exploring alternative combinations of fundamental parameters can generate better returns, as checking the right boxes improves the selection process.
• Combining the best-performing fundamental metrics with a filter to discriminate positive vs. negative trends may offer superior returns consistently, as the risk of exposure to falling stocks is reduced.
• All supported by rigorous tests and validation across market history.

Here is how this critical discovery process works:

• Pick any selection rule from a rich database of parameters, covering fundamental, quantitative, volatility, size, and trend metrics. Decide the allocation and rebalancing rules.
• Test in any investment universe across 15 years of market cycles and assess the actual alpha contribution.
• Explore alternative combinations of rules that check more quality boxes.
• Optimize and discover the winning mix. 
• Validate the results with rigorous evidence across the years.
• Design your winning strategy and execute it.

The quality of the available information has an obvious impact on the effectiveness of the decision process. Investors need to go to the facts and unveil the winning mix of selection rules. Advanced technology can open a wealth of knowledge that has been previously ignored or not updated to today’s ongoing volatile marketplace.

Trendrating is changing this with our “performance management” technology  that offers a  breakthrough of market intelligence and factual insights. We designed our research platform so that, in a few clicks, it can enable investors to discover what fundamentally works and what does not with enlightening fact-finding and rigorous validation. The impact on investment performance for active investors is fully measurable and trackable in the Trendrating system.

The other major missed opportunity for many active funds and ETFs is in not systematically using price trend methodologies built to specifically profit from the performance dispersion across stocks. Performance dispersion offers the opportunity to beat the benchmarks by capturing the outperformers and avoiding the underperformers.

As an example, over the last 6 months in the US large-cap investment universe, the top 25% performers posted an average gain of 44% and the bottom 25% performers lost an average of 17%. That marks a 61% average differential between the losers and the winners. However, without the right trend following technology, how many active portfolio managers have been able to profit from this fact? Conventional research, data, and systems broadly used have failed at providing an edge at facilitating alpha discovery and exploiting performance dispersion.

The mission of Trendrating is to fill this critical gap and to provide a unique platform to quickly and efficiently discover the intelligence and insights not available in other systems and services that can produce measurable alpha. Active managers can use the Trendrating platform to enrich their research and use the resulting insights to optimize their investment strategies and model portfolios. Systematic investors can easily build, document, and execute custom-made, rule-based strategies.

We provide an innovative discovery platform for performance management that can improve investment performance and more effectively control risks. The actual contribution to alpha is visible and trackable in our system.

This is the foundation of our proposition, setting our solution apart from conventional offers. We welcome and offer an extended trial period to investment managers to observe and evaluate the edge we offer. They can observe, track, measure, and validate the improved performance that can be obtained in our platform with full transparency.

This article was originally published here and is republished on Wealthtender with permission.

About the Author

Bill Hortz

Founder Institute for Innovation Development

Bill Hortz is an independent business consultant and Founder/Dean of the Institute for Innovation Development- a financial services business innovation platform and network. With over 30 years of experience in the financial services industry including expertise in sales/marketing/branding of asset management firms, as well as, creatively restructuring and developing internal/external sales and strategic account departments for 5 major financial firms, including OppenheimerFunds, Neuberger&Berman and Templeton Funds Distributors. His wide ranging experiences have led Bill to a strong belief, passion and advocation for strategic thinking, innovation creation and strategic account management as the nexus of business skills needed to address a business environment challenged by an accelerating rate of change.