Every investment universe exhibits broad performance dispersion – a range of performance results in markets and sectors that still exist despite the overall current market weakness. Whatever investment approach or selection strategy you use, taking advantage of performance dispersion can support your alpha generation and risk management efforts.
The question is how do you discover this dispersion across stocks and markets in a timely fashion and profit from it?
To answer this question, we went to Institute member Rocco Pellegrinelli CEO of Trendrating - a global leader in the field of advance analytics and “trend capture” technology. The firm just launched a new website alphadispersion.com where you can find free up-to-date statistics to measure and analyze the dispersion in the markets and sectors of your interest. This dispersion data can help advisors and asset managers exploit dispersion by discriminating between best and worst performers. We asked Rocco questions to better understand the opportunity.
Hortz: What is performance dispersion?
Pellegrinelli: Dispersion measures the magnitude of stocks price trends and the differential between bull trends and bear trends. Dispersion is a unique opportunity for active investors using the right data and tools to track and capture trends. Being able to identify in time the outperformers while avoiding most of the underperformers can enhance returns on a consistent basis, as dispersion is a broad and recurring phenomenon.
Hortz: How do price trends develop?
Pellegrinelli: Price trends are the result of the combined impact of buyers and sellers for any specific stock. If the aggregated money flow from buyers exceeds the outflow from sellers on a consistent basis, then a bull trend is produced. A bear phase happens when the balance is weighted on the sellers side. But how do investors decide to buy or to sell? Understanding this is critical
Some investors can be guided by fundamental analysis. This was a key driver of the past. Today the world is more complex. Investors can be influenced by a variety of motivations including social media influence, rapid shifts in sentiment, fast changing economic changes. The big pools of money controlled by large players as sovereign funds can decide to change the allocation on the basis of ESG and other investment policy considerations. And a growing army of momentum players create and fuel trends up and down. So, bottom line, trends are the result of the combination of several forces at work, where traditional fundamental valuations have a decreasing impact.
Hortz: How do you capture trends? What works, what does not work?
Pellegrinelli: If you want to capture trends, just analyze and measure trends. Common data and tools though are ineffective at discriminating bull vs. bear trends. Conventional methodologies and traditional metrics ignore the actual price action which is the only thing that counts to exploit trends. Capturing trends requires specific methodologies that can evaluate and rate trends, objectively differentiating between up and down trends, as any other approach misses the point. The most effective methodologies are based on massively tested and proven mathematical models, as any human interaction can only be a drag due to potential biases, arguable opinions and tricky emotions.
Our trend discovery model provides a rating metric to discriminate bull versus bear trend and to quickly spot trend reversals across stocks with a high level of accuracy.
Hortz: Why does it works?
Pellegrinelli: Our approach works because it is agnostic, opportunistic, pragmatic, and unbiased as it is based on a multi-factor AI pattern recognition model that avoids any human interpretation and forecast. Our fresh, innovative data and technology delivers a layer of logical market intelligence whose value is fully transparent and measurable that fills a critical gap of needed information for active managers in any investment universe.
Bull trends are identified by positive ratings. Bear phases by negative ratings. Upgrades and downgrades signal trend reversals and are notified via alerts.
Hortz: Any final thoughts on why active managers should capture performance dispersion?
Pellegrinelli: We offer a new, different set of analytics and tools to measure performance dispersion and rate price trends; filtering out market noise, arguable opinions, and disputable research. We would like to invite you to learn more with our new website where we share research articles on performance dispersion and give you access to free up-to-date statistics to measure and analyze the dispersion in the markets and sectors of your interest.
We are already serving more than 200 institutional customers globally with our proprietary methodologies being used as part of their investment decision-making process in wealth management, private banking, advisory and hedge fund fields to maximize returns and better control risks. You can also find our analytics with key strategic partners including Bloomberg and Euronext.