Philosophy

R-Squared Risk Management is independent and employee-owned.

We began designing and building Customised Hybrid Risk Models in 2003, continuing and refining the work Jason MacQueen started in 1980. In response to the success of portfolios constructed using these models, R-Squared expanded from 2009 into Quant Partnership and Risk Consulting.

R-Squared’s goal is to help managers improve their investment performance by ensuring that their portfolio selection skills are harnessed efficiently by aligning risk with expected return and eliminating unwanted risk.

Efficient portfolio management is about balancing the various sources of risk in a portfolio against the corresponding expected returns.  This can be done both for the individual holdings in the portfolio and for the various factor bets that the manager is making.

The ultimate goal of portfolio risk management is to improve the performance of the portfolio, either by improving the returns, or by reducing the risk, or both.

The whole point of using a customised risk model is to manage the risk of a portfolio more efficiently.  This involves not just forecasting the overall risk of a portfolio, but, more importantly, analysing the contributions to portfolio risk either from the different holdings, or from the different factor exposures.  At its most basic – and most useful – this analysis enables the manager to answer the question “How big are the various bets made in this portfolio (either by holding or by factor), and are they justified by the expected returns?”

We believe that the skill of most professional investment managers is often not reflected in the performance of their portfolios because the risks have not been managed properly. Often the contributions to portfolio risk are not in proportion to the corresponding expected returns.  Far worse, however, is the fact that very often the unintended bets in a portfolio can dominate the deliberate bets that are the sources of performance due to a manager’s skill. It is for this reason that the performance of an actively-managed portfolio often shows no evidence of skill.

Our clients benefit from our history of constant innovation in risk modelling and our extensive experience in risk management as investment manager, CRO and specialist risk advisor.

We have been at the leading edge of equity risk model development for over 30 years.  Amongst other things, we were:

 

  • First to develop risk models for markets outside the USA (1980 onwards)
     
  • First to develop a Global Asset Allocation model (1983)
     
  • First to develop Reverse Optimisation as an efficient portfolio rebalancing technique that allows portfolio managers to incorporate both quantitative forecasts and qualitative judgments into their return expectations (1984)
     
  • First to develop a Global Risk Model (1993)
     
  • First to recognize and estimate multiple currency, industry and country factor exposures for stocks (1993)
     
  • First to build hybrid risk models (2003)
     
  • First to build customised risk models (2003)
     
  • First to incorporate macro-economic variables into risk models so that portfolio managers can determine the exposures of their portfolio to any number of such variables (2008)
     
  • First to develop XRD risk models as a way of reducing estimation error (2010)
     
  • First to develop TNT models to cope with extreme market conditions and crashes as well as normal market conditions (2011).