The financial crisis teaches us the vulnerability of equity portfolios to systemic risk. At MRA, we work closely with institutional investors to identify, understand, and mitigate these risks while delivering alpha generating ideas.
Supply and demand factors can often force market prices to stray away from fundamentals. This can happen for long periods in extreme leveraging and deleveraging cycles. The internet, credit, and sovereign bubbles are recent examples.
The 2008 crisis underscores the importance of macro and systemic risk factors. Because the system of financial risk exposures is so highly interwoven, investors must understand the correlation of assets in their portfolios. MRA White Paper: Correlation and Portfolio Construction
Market prices often provide the illusion of stability when no such safety actually exists. A VIX of 10 in early 2007 substantially belied the build-up of credit and mortgage risk that would lift it to 80 in late 2008.
Markets are highly reflexive. Market prices not only reflect market risks but they play an important role in shaping economic outcomes. These feedback loops can be very powerful. MRA White Paper: Lehman 5 Years Later
Central Banks and policymakers are important players in determining market results. Understanding their intentions and degree of wherewithal is critical.
Our team of is fully engaged each day in the process of helping clients understand subtle yet important investment themes and the drivers of global market risk.
MRA’s comprehensive and proprietary risk evaluation process spans all major asset classes. First, we perform both qualitative and quantitative analysis to assess the risk environment. This process includes analyzing credit market conditions, broad economic trends, the arc of Central Bank policy, market positioning, and risk appetite. Next, we utilize deep expertise in the derivatives markets to develop option structures that most effectively express a view on risk. Our time tested, systematic approach provides clients with critical input in efficiently managing portfolio risk.