Process Alpha Videos Archive
The Sherpa team regularly hosts webinars, seminars and speaks at industry events on portfolio construction topics. You can also find our Process Alpha videos on the Sherpa Funds Tech Process Alpha YouTube channel. Subscribe to our channel for updates or follow our Archive page here.
Process Alpha Videos
Webinar YouTube Links
- How Good Is Your Portfolio?
- How Good Is Your Portfolio? – Part 2, Ex-Ante Analysis
- How Good Is Your Portfolio? – Part 3, Putting it all Together
- What Does Your “Best” Portfolio Really Mean?
- Does Your Long/Short Equity Portfolio Deliver the Risk Your Investors Want?
- Understanding the Problem – What Are You Good At?
- Understanding the Problem – Know Your Factor Bets
- Setting Up the Problem – The 3 Cs for Setting Constraints
- Setting Up the Problem – The Impact of Your Constraints
- Sherpa’s 5 Steps for Better Portfolio Construction
Video Overview Descriptions
1. How Good Is Your Portfolio? link
The first in our “How Good Is Your Portfolio?” series introduces the concept of assessing your portfolio results against “Candidate Portfolios” to determine if your portfolio is good.
First we introduce the basic concept of using portfolio constraints to define the universe of potential eligible Candidate Portfolios you COULD construct. Then we show how analyzing a large number of Candidate Portfolios can help separate the impact of good asset selections from good portfolio construction decisions. Finally we show how to determine if your portfolio construction is consistently good by comparing against other eligible outcomes.
Check out our blog here for a brief introduction to Candidate Portfolio Analysis.
2. How Good Is Your Portfolio? – Part 2, Ex-Ante Analysis link
The second “How Good Is Your Portfolio?” webinar introduces the Risk Quality Score and the Risk Quality Graph visualization.
This webinar focuses on Sherpa’s core drivers of a well-constructed portfolio – the Risk Quality Score of an asset and its downside Co-Movement. We define the Risk Quality Score as a measure of the bet quality of a given asset and think about the implications for portfolio construction. Then we bring in the asset’s downside Co-Movement and portfolio constraints to show how these measures impact asset weighting in a well-built portfolio. We introduce the Sherpa Risk Quality Graph to give PMs a tool to quickly visualize the composition of their portfolio. Finally we show how different types of portfolio composition produce very different results.
Check out our blog here for a brief introduction to the Risk Quality Graph.
3. How Good Is Your Portfolio? – Part 3, Putting it all Together link
Our third and final “How Good Is Your Portfolio?” webinar combines the Candidate Portfolio and Risk Quality Graph tools to illustrate how PMs can determine the amount of risk they want ex-ante to drive better results.
During this session we provide a quick overview of the Candidate Portfolio and Risk Quality Graph tools. Then we explore how ex-ante risk preference and portfolio composition impacts ex-post results. Using a sliding scale Risk Number and the Risk Quality Graph we show how a PM can finetune their Expected Risk and Expected Return. Combining these tools gives a useful process to determine how much risk you want to take, that you’re taking it well, and that its giving the “good” results you expect.
4. What Does Your “Best” Portfolio Really Mean? link
Building on the concept of Candidate Portfolios from our previous videos, this webinar discussed how to evaluate potential portfolios to find the “best” portfolio to implement your ideas.
In this webinar we break down how to define the “best” portfolio into (1) How do we evaluate a portfolio? and (2) What market data set(s) should we evaluate the portfolio on? We introduce a risk tolerance-based asymmetric utility function that can be used to measure the utility of P&L against the PMs unique risk profile. Then we discuss how to generate many forward-looking market data sets that reflect underlying uncertainty in the alpha in the PM’s picks and the stability of the market covariance structure. Evaluating potential candidate portfolios using the utility function method against the defined universe of uncertain market data evolutions lets us find a robust “best” portfolio that is good per the PM’s risk tolerance against many possible futures.
5. Does Your Long/Short Equity Portfolio Deliver the Risk Your Investors Want? link
The first of our “Risk You Want” webinars creates a range of possible equity long/short portfolios to show the impact of changing risk objectives on portfolio outcomes.
The idea of taking “More of the Risk You Want, Less of the Risk You Don’t” is core to the Sherpa portfolio construction approach. In this session we show how varying risk objectives lead to different portfolios that meet different investor requirements. First we create 4 portfolios reflecting widely used equity long/short strategies. Then we examine the ex-ante risk factor exposures and ex-post risk attribution to see how well the portfolios take the desired risk. At the same time we look at how those levels of risk translate into returns. Finally we discuss controlling for residual factor risks and varying the level of risk within the market neutral strategy.
6. Understanding the Problem – What Are You Good At? link
Before you can effectively bring quantitative methods to bear solving the portfolio construction problem you must understand the inputs to the problem. This session is the first Process Alpha focused on understanding the inputs to the problem.
In this session, we look at different methods to analyze a PM’s idea quality to inform their portfolio construction decisions. We look at ways to think about how robust the PM’s asset selection, asset scoring and idea persistence are to determine how best to capture their alpha. Then we identify how those findings can inform different approaches to portfolio construction that deliver substantially different portfolios. Finally we show how a systematic process can then delivers dramatically improved results by better understanding the alpha inputs.
7. Understanding the Problem – Know Your Factor Bets link
Any consistent, replicable idea generation process will have biases – characteristics the process tends to favor over others. Frequently in the equity space this manifests as consistent factor tilts. Our second Process Alpha focuses on understanding how the factor bias in your ideas.
In this session, we explore the impact of different approaches to residual factor risk. We start by introducing a straightforward process to measure factor bias in a PM’s portfolio or idea track record. Next we talk about different intentional decisions the PM can make regarding that factor risk, such as mitigation, active factor tilts in the portfolio or simply retaining the factor exposure. Then we construct a series of portfolios with different ex-ante factor risk objectives to show the impact of this important decision on portfolio outcomes. The results in this session show the importance of conscious factor risk decisions – the factor bets in this case could have doubled or zeroed the portfolio returns from the same alpha!
8. Setting Up the Problem – The 3 Cs for Setting Constraints link
If you ask the wrong question, you’ll get the wrong answer. The first Process Alpha session on setting up the portfolio construction problem introduces the concept of portfolio shape and discusses how it gets created.
Sherpa’s experience suggests most fund managers that fail to benefit from systematic portfolio construction fail to ask the right question of their mathematical solver. The “shape” of the portfolio they’ve defined is not an accurate representation of the problem they want to solve. In this session we talk about the importance of accounting for all relevant portfolio stakeholders in building out the constraints that define the shape of the portfolio. Then we discuss different ways to think about constraints – portfolio- / group- / asset-level or hard / soft. Next we introduce Sherpa’s 3 Cs framework for evaluating constraints – Complete, Coherent, and Consistent. Finally we show examples of the challenges and importance of resolving constraint issues using the 3 Cs to ask the right question and get a useful answer.
Check out our blog here for a brief introduction to the 3 Cs for Constraints framework.
9. Setting Up the Problem – The Impact of Your Constraints link
Even fund managers with well-defined sets of portfolio constraints often don’t truly understand how those constraints impact their portfolio construction. The second Process Alpha session on setting up the portfolio construction problem uses the Candidate Portfolio framework to introduce novel ways to measure the impact of different constraint statements.
One of the best ways to measure the impact of portfolio constraints is to look at the set of possible outcomes in a given problem definition. During this video we show how to use the average / median portfolio returns as well as different percentile spreads from the Candidate Portfolio analysis to illustrate the impact of each constraint statement. As we go through different constraints we see that the results are not always intuitive, suggesting fund managers may benefit from more time considering how important or “hard” the constraints are on their portfolio.
10. Sherpa’s 5 Steps for Better Portfolio Construction link
At Sherpa we often discuss the concept of a process-driven approach to portfolio construction to emphasize the necessity of a robust process to produce consistent results. The 5 Steps provide a useful framework for fund managers when thinking about the process of transforming their research alpha into an investable risk-taking portfolio.
In this session, we introduce Sherpa’s 5 Steps for Better Portfolio Construction: UNDERSTAND – DEFINE – CALCULATE – EXPLAIN – MANAGE. The 5 Steps make up a robust, iterative process-driven approach to portfolio construction. As we walk through each of the steps we define the questions PMs need to answer at that stage of the process, as well as map back to analytics discussed in previous Sherpa webinars which were developed to help answer those questions. Ultimately this webinar shows how the pieces fit together to help fund managers refine their portfolio construction process.
To see the potential impact of improved portfolio construction on your portfolio and learn more about refining your team’s portfolio construction process, get in touch with the Sherpa team or sign up for the SFT mailing list here.