Global Dynamic Risk
Convex Capital’s Global Dynamic Risk strategy seeks opportunistic return across global markets with the objective to grow and protect capital under different economic and capital market environments.
The Global Dynamic Risk strategy is based on proprietary economic research of 30 countries and risk assessment of global capital markets. The strategy seeks to limit downside while keeping the upside (up-market beta is higher than down-market beta). The process aims to manage risks as they ebb and flow with dynamic asset allocation. The portfolio aims to de-risk and re-risk quickly based on proprietary risk ratings, changes in volatility and event based scenarios. The strategy seeks to cover the entire spectrum of financial markets with econometric evidence and residual effect from volatility and exogenous events. The process is disciplined and seeks to limit the behavioral biases of portfolio managers. It is not driven by valuation and the embedded risk management function aims to reduce vulnerability to ‘tail-risks’. Global Dynamic Risk follows a nonparametric approach that depends on fundamental macroeconomic research and limits the use of assumptions.
The investment process has three pillars – Proprietary Risk Ratings, Portfolio Construction, and Risk Management. Convex’s proprietary risk ratings seek to reflect the current and expected state by capturing economic and business cycle trends as well as inflection points in an economy using Convex Proprietary Leading Economic Index (CPLEI). CPLEI uses leading economic indicators, yield spread and benchmark rate analysis as potential recessionary signals. The index also monitors change in asset prices to corroborate with economic and business cycle trends. The objective here is to determine whether economic growth is in line with trend, above trend or below trend for a country which allows the team to increase intelligence about current macroeconomic environment and estimate the threat of recession in near-term. The current macro environment for growth assets (‘Buy’, ‘Hold’, ‘Caution’, ‘Sell’) in a country is determined based on machine learning algorithms.
The portfolio construction uses two buckets – Growth Assets and Diversifiers, and the composition depends on our Global Rating. The portfolio would have more equity exposure if the global rating is ‘Buy’ and reduced equity exposure if the global rating is ‘Sell’. Convex uses a systematic evidence based approach along with the PM’s judgement for portfolio construction.
Risk management aims to reduce vulnerability to ‘tail-risks’. Risk management function identifies large negative shifts in leading economic indicators and avoids ‘known-unknown’ risks with event-based scenario analysis following a game theory approach. It also monitors portfolio volatility on a daily basis with proprietary volatility assessment to avoid risk assets with higher volatility.