For tactical investments, Riskalyze calculates upside downside capture ratios, volatility, and correlation data from Jan 1, 2008, to present. Our upside and downside capture ratio calculations are taken over four distinct market environments.
Our analysis confirms that calculating capture ratios over short frequencies (think daily, weekly or monthly data points) is not as robust as calculating capture ratios throughout or during a trend. Calculating capture ratios throughout a trend is objective and gives tactical managers multiple opportunities to prove their strategies. So, instead of having one upside/downside capture ratio based on Jan 1, 2008, to present analysis statistics, our methodology takes into account the upside/downside capture ratios over four different market periods.
These market environments include:
- January 2008 through February 2009 (Bear Market)
- March 2009 through April 2011 (Bull Market)
- May 2011 through September 2011 (Bear Market)
- October 2011 to present (Bull Market)
For newer tactical strategies, the capture ratio will be affected to the extent that a tactical strategy did not participate in any of the four market environments. For example, a strategy with a 2012 start date will not include data that allows for downside capture calculations, thus downside capture will be correlated to upside capture until the strategy navigates a bear market.
Behind the scenes, Riskalyze has calculated the upside capture during the bull market environments and the capture ratio during bear market environments. An investment that lagged in up markets will have a lower upside capture ratio. An investment that protected principal in bear markets will have a low downside capture ratio. This methodology empowers advisors to analyze tactical strategies through a wide variety of macro outlooks.
To have an investment analyzed through our tactical methodology, an advisor should confirm that the return mode is set to tactical. To do this, the advisor needs to click on the investment, then select "Tactical" from the Return Mode drop-down:
Our tactical analysis/methodology starts with the selected 'data model.' Assuming you are using the default "long term consensus" or 5.2% return in the S & P 500 over the next 6 months...
Let's review the Jedi Tactical Fund as our example. Assuming an up market (long term consensus) +5.2% for the S & P 500 x Jedi Tactical's upside capture ratio of 42% = ~2.2% for 6-month projected return..... multiply times 2 and you get the PAR (annualized expected return over the long term) of 4.4%.
So, Jedi Tactical has an upside capture ratio of 42%. If the data model assumes a +5.2% return in 'the market' one would expect Jedi Tactical to return ~2.2% over the same 6 month period. The PAR is 2 x 2.2% or rounded to 4.4% PAR. Keep in mind that our analysis takes into account all data from 2008-present to calculate volatility and correlation statistics.
Note: to see the effects of downside capture change the return in the data model to a negative return and we'll use the same methodology using downside capture stats. See Stress tests too.
Math for upside and downside capture ratios:
2008-2009: Market -41.66% Security -6.28% (downside)
2009-2011: Market 97.62% Security 43.92% (upside)
2011 bear: Market -10.78% Security -10.93% (downside)
2011-2015 ("present"): Market 101.09% Security 39.08% (upside)
Total market upside is 198%, total Jedi upside was 83% or upside capture ratio of 42%.
Advisors can quickly select the Stress Test feature to see real-world performance expectations given the calculated upside and downside capture ratios. Select "Stress Tests" on the right-hand side of the screen under the portfolio Risk Number.
Adjusting the Data Model
Advisors can efficiently change the data model to reflect various market projections and quickly see the expected risk and return analysis reflecting these projections. When an advisor enters a negative expected six-month S & P 500 return, the Riskalyze methodology will use the calculated downside capture ratio. When an advisor enters a positive S & P 500 return, the Riskalyze methodology will use the calculated upside capture ratio.
Advisors can also choose to incorporate their outlook and analysis into Riskalyze by way of clicking on the investment and reviewing/overriding the risk and return inputs for individual holdings. If an advisor wants to assume a given level of return or volatility, she can enter it in this manner.