Corporate Business Risk Assessment

Consultant “Evaluation Framework”

  1. People: Who are you?
  2. Performance: What are your returns?
  3. Philosophy: What gives you an edge, or alpha?
  4. Process: How do you implement your philosophy?
  5. Portfolio (optional): Does your portfolio reflect your philosophy and process?


Investment Management as a Factory

Focusing on the investment process to control business risk

If investment management is a factory, then the investment process is its production line. A good investment process is a Deming Process, where all the parts move together in a well choreographed dance.

But it’s also a business… our work focused on implementation steps (2-4) to control business risk:

  1. Alpha generation: What do you buy and sell?
  2. Portfolio construction: How much do you buy and sell?
  3. Trading: Optimizing trading costs.
  4. Review & control: Did all the components of the investment process work as advertised and as a team?


Portfolio Construction

Secrets you never learned in business school

1. Reading your client: What is your actual benchmark?

  • Stated benchmark?
  • Median or average competitor?
  • Cash, or absolute return?
  • Blend of above?

2. Controlling your bets: The object of portfolio construction:

  • Distill and control your intended bets (Macro factor, sector, individual position, e.g. Nortel problem in 1999)
  • Eliminate or minimize your unintended bets


Reverse Engineering Competitors

Positioning vs. competitors to control business risk


Can be done on either a single portfolio or an “average competitor” composite.What we need:

  • Daily returns, e.g. mutual fund
  • Benchmark return
  • Estimate of turnover (fast, slow)


Trading: Not an afterthought

Letting the trading desk shine

No one-size-fits-all solution:

1. Cost of trading: Focus on the sum of the components

  • Commission: Most visible, but often the lowest cost component
  • Impact: The price of crossing the bid-ask spread (VWAP benchmark)
  • Opportunity: The cost of incomplete trades

2. Execution alpha: Timing your trades

  • The reason for trading (trading with or without information, e.g. alpha from earnings report vs. portfolio re-balancing)
  • The price of chasing overbought or oversold stocks


Execution Alpha: An example

The effects of price momentum on execution timing


When the market is rising, price momentum outperforms

  • Positive returns in up markets
  • Negative returns in down markets
  • Timing the momentum factor: How do you identify up and down markets?


Review and Control

Did all parts of the process work as advertised?

  1. Investment model diagnostics
  2. Portfolio attribution analysis
  3. Portfolio implementation shortfall analysis
  4. Integration: Did all components work together as a team?

Sometimes the greatest learning, or scar tissue, comes from negative performance.



Equity quantitative analyst since 1985

  • CIBC World Markets, quantitative and special situations analyst (1985-1990)
  • Batterymarch Canada, quantitative Canadian equity PM (1990-1994)
  • Batterymarch Financial Management, quantitative global equity PM (1994-2000)
  • Graham Capital Management, long/short equity hedge fund PM (2001-2003)
  • Merrill Lynch, technical research analyst on Institutional Invest ranked team, successor to Bob Farrell (2004-2007)
  • Consultant to hedge funds (2007-present)
  • Qwest Investment Management Corp., (2009-2014)
  • Blogs as Humble Student of the Markets

Broad range of experience

  • Global markets (Canada, US, international, emerging markets)
  • Wide product experience (Institutional, mutual funds, global natural resources)
  • Bottom up stock selection, top down asset, country, sector selection
  • Risk control and portfolio construction
  • Trading cost optimization
  • Product engineering, client service and marketing