Prisma Insights: May 2022
Launch of Prisma platform
We are excited to launch our brand new platform,?Prisma, a fully data-driven platform that provides financial advisors and institutions with indicators powered by Alquant to help them navigate challenging market conditions.
This month has been a strong one for Alquant’s risk indicators. Read below how our indicators helped financial advisors and large institutions outperform the S&P 500 by 5% and?register now?to position your equity portfolio ahead of turbulent times, avoid drawdowns and stabilize performance.
To get a better understanding of the Prisma platform, you can watch this video:
Spotlight of the month
Introduction to our Equity Risk Indicator (ERIC)
Prisma offers a set of 5 quantitative indicators based on different signals and dynamics, from short-term volatility to medium-term macroeconomic data and other alternative data sources. On the platform, users can create their own indicators based on those designed by Alquant. The?Equity Risk Indicator (ERIC)?is an equally weighted combination of our 5 indicators and is accessible on our platform through a free account.
Let us examine the performance of applying ERIC to the S&P 500 Index. To get a first general impression, we compare such an investment strategy with the S&P 500 index itself since the beginning of the year. The risk indicators available on Prisma are indeed designed for such stressed and/or declining market environments.
Returns: -8.1% VS -13.3%
Volatility: 9.8% VS 24.2%
Max. drawdown: -10.3% VS -18.7%
Since the beginning of 2022, the ERIC indicator has significantly reduced the maximum drawdown of the S&P 500 Index, which was -18.7 %, to 10.3 %, showing its strong impact in turbulent times. In terms of absolute returns, the S&P 500 saw a decline of 13.3%, while an actively managed portfolio using ERIC returned -8.1%, outperforming the index by more than 5%. The chart above illustrates that the most volatile periods this year were clearly identified as “very risky” periods (dark red shaded areas). By reducing exposure during those periods, ERIC was able to reduce the annualized volatility by more than half.
Let us now try to have a broader overview and take an analysis period of 3 years.
Annualized returns: 14.1% VS 14.5%
Volatility: 11.0% VS 23.8%
Max. drawdown: -10.3% VS -33.9%
Sharpe Ratio: 1.15 VS 0.54
Applying ERIC to the S&P 500 Index has not led to absolute outperformance over the past 3 years. However, looking at the statistics of our two strategies, the added value of using a risk indicator becomes clear. Most of the annual returns of the S&P 500 Index have been maintained, while the maximum drawdown has been reduced by a factor of 3 and volatility by half. Thanks to these features, the Sharpe ratio was doubled over this period. This risk indicator has thus proven its value over the past 3 years and helps make investing in equity portfolios less bumpy for investors.
Vega shines during market turmoils
The?Vega indicator?analyses the dynamics of various volatility indices in order to identify whether their movements reflect an underlying panic in relation to the expected short-term evolution of the markets. It is during hectic and indecisive months such as May that indicators such as Vega are likely to provide a real advantage in the equity market and not only protect an investment but also boost it. The indicator remained above 75% (corresponding to very high risk) until 23 May, before falling back to 0% risk within 2 days, taking advantage of the rebound in the S&P 500 Index to end the month at +4.5%. Once again, this indicator has proven to be useful for a specific type of period during which markets change direction in a sudden and unexpected way. The year-to-date performance and statistics of the Vega indicator are shown below:
Returns: -4.5% VS -13.3%
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Volatility: 14.8% VS 24.2%
Max. drawdown: -11.8% VS -18.7%
Credit remains wisely cautious
The?Credit Indicator, which is based on the lending environment and corporate financing conditions, has been in “risk-off” mode since February 2022, which has allowed it to avoid most of the market downturn. The credit indicator has therefore spent the entire month of May without exposure to the equity market and has also avoided the losses of the S&P 500 Index last month. The performance and statistics of the Credit indicator since the beginning of the year show its ability to anticipate turbulent economic phases:
Returns: -3.3% VS -13.3%
Volatility: 3.7% VS 24.2%
Max. drawdown: -4.9% VS -18.7%
Macroeconomic continues to bring stability
The?Macroeconomic indicator?aggregates and analyses economic data to anticipate recession periods. This indicator has proved to be particularly relevant and useful at the start of the year. Macro spent most of the month in very high-risk mode, reducing the maximum drawdown in May from -9.3% to -2.2%. The following graph shows the development of the Macroeconomic indicator since the beginning of 2022 with the corresponding statistics for this period:
Returns: -5.9% VS -13.3%
Volatility: 8.2% VS 24.2%
Max. drawdown: -7.8% VS -18.7%
In hindsight, the Macroeconomic indicator had already recognized the coming economic difficulties and recommended a reduction in exposure during the end of the bull phase in the second half of 2021 in order to anticipate the difficult phase in early 2022 and ultimately protect the returns achieved by the markets over the last two years.
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Interactively explore our indicators
If you are interested in exploring our indicators in detail and applying them to various market indices, as well as being notified when our indicators are triggered, create a free account on Prisma. In addition, with an account, you can download our indicator guides that explain what is behind our indicators and how to apply them.
Disclaimer: This content is advertising material. This content as well as all information displayed on Prisma or any of Alquant’s websites does not constitute investment advice or recommendation, and shall not be construed as a solicitation or an offer for sale or purchase of any products, to effect any transactions, or to conclude any legal act of any kind whatsoever. Past performance is not a guide to future performance.