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Main | Probability-weighted return is the optimal method to construct a portfolio »

December 21, 2008

Is your portfolio ready for 2009? Getting back to fundamentals.

It seems that every firm we speak to is struggling with the same set of problems right now. The manic nature of the market has caused a lot of funds to lose sight of their fundamental process.  Firms are also struggling to improve their risk controls, raise and maintain capital, and are feeling the pressure to provide greater transparency.  These are indeed unique and challenging times to be running a fund.

 Alpha Theory has listened to the concerns from our clients and we’ve built in several ways to address these fundamental challenges. The New Year presents an opportunity to those firms that can adapt to changing circumstances and we are committed to helping our clients maximize their ability to respond to this climate. Here is how Alpha Theory can help you address these issues in 2009:

·         Getting Back to Fundamentals – Has your fundamental research process been disrupted by the current environment?  Alpha Theory forces every analyst to think critically about every asset’s potential upside, downside risk and conviction level.  This has a dramatic impact on the research quality of each analyst and your ability to critique it.  By having your team systematically update their analysis, you will be prepared to go into 2009 with a clear picture of your portfolio, risk, and research. 

·         Insufficient Risk Controls – Did recent volatility expose risk and loss control issues in your fund?  Alpha Theory helps frame portfolio decisions with critical fundamental risk factors like potential loss, maximum position size, loss controls, liquidity, time horizon, sector exposure, portfolio exposure, market risk, risk premium, analysis stage, analyst abilities, chance for extreme loss and potential fund loss.  These factors are considered by most fundamental managers during portfolio construction but Alpha Theory provides you a way to explicitly control these risks.  The increased level of risk control is a feature that funds and investors are increasingly demanding.

·         Capital Concerns – Are you concerned about raising and keeping capital?  It is a difficult environment to raise capital, so funds must highlight the methods they use to differentiate themselves.  Alpha Theory’s disciplined framework for deconstructing research, quantifying it, and using it to determine position size while staying acutely aware of risk can be one of the most thought provoking aspects of a firm’s presentation to institutional investors.  In fact, it can also help protect capital for firms that address investor concerns by explaining their new systematic approach for portfolio management.

·         Improving Transparency – Are you anticipating that investors and regulators are going to demand greater transparency into your investment process? This is a common concern and with good reason.  Investors and regulators are in fact aggressively pushing for greater fund transparency.  Alpha Theory provides a quick view of the portfolio and logic behind decisions in a concise format that should allay any transparency requirements.

2008 has been a unique and challenging year where fundamentals have not been the primary driver of equity values.  But fundamentals will matter again and Alpha Theory can help your firm prepare for 2009 with the benefits mentioned above.


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