Our Thinking
Modern Portfolio
Theory
Modern Portfolio Theory states that “it is the duty
of the prudent investment manager to identify the combination
of assets that yields the highest return for a given
level of risk or which yields the lowest risk for a
given level of return”. MPT can be distilled down to
three crucial performance evaluation categories. Each
potential investment is analyzed and ranked for its
expected: 1) Reward-to-Risk ratio, 2) Consistency of
Returns and 3) Correlation to other investments. Santa
Barbara Quantitative Strategies employs a proprietary
method of establishing largest expected peak to trough
draw down in each investment vehicle while determining
expected correlation between diversified return streams.
The result is an efficient portfolio with a well-defined
risk tolerance.
Core Focus
SBQS has a core-focus on Quantitative Proprietary Investment
Strategies. An examination of the empirical evidence
has revealed that when superior money managers are ranked
by reward-to-risk ratios and consistency of returns,
approximately 80% of the top-ranking managers are Quantitative.
Proprietary Investment Strategies have two key benefits:
1) low correlation of performance returns, and 2) greater
sustainability of future returns.
Quantitative vs. Discretionary
Quantitative managers can be characterized as having
a rigorous mathematical discipline that is used to identify
investment strategies that have a quantifiable investment
edge, while discretionary managers rely on human judgment
to identify investment opportunities and manage risk.
A portfolio constructed with a strong bias toward top
Quantitative managers is expected to imbed: 1) superior
reward-to-risk ratios, and 2) consistency of returns
into the return stream.
Proprietary vs.
Theme Style
Proprietary strategies are extremely unique strategies
that are usually developed in isolation. A significant
feature is their large barrier to entry. Proprietary
Investment Strategies have two key benefits: 1) low
correlation of performance returns, and 2) greater sustainability
of future returns. Conversely, theme style strategies
are investment styles where the investment edge is widely
known and few, if any, barriers to entry exist. The
lack of barriers to entry results in both "common investor
risk" and ever increasing competition. This "common
investor risk" was exhibited in the liquidity crisis
of 1998. Forced selling by theme style managers spilled
over into nearly all theme style strategies causing
lock-step correlation. As a result, virtually all theme
style strategies simultaneously lost money. Correlations
are the worst enemy of a diversified portfolio.
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