SANTA MONICA, Calif.--()--Identifying increased levels of systemic risk can provide an early warning signal of financial turbulence, Mark Kritzman, CEO of Windham Capital, said in a presentation entitled Risk Regime InvestingTM for delivery today to the Fiduciary Investors Symposium in Santa Monica, an international gathering of chief investment officers and senior investment executives.
“Our research into systemic risk provides useful insights into the relationship between fragile market conditions and the onset of periods of financial turbulence in which many investment strategies experience significantly lower returns to risk.”
“With the interconnectedness of markets and asset classes, institutional investors require innovative approaches to positioning portfolios in rapidly changing risk environments if they are to meet their liquidity and funding challenges in the decades ahead,” said Kritzman in his presentation. “Our research into systemic risk provides useful insights into the relationship between fragile market conditions and the onset of periods of financial turbulence in which many investment strategies experience significantly lower returns to risk.”
In his presentation, Kritzman cited research that shows systemic risk tends to rise prior to significant market declines and can be a leading indicator of financial turbulence. He said Windham has defined a series of Risk Regimes, or states of risk, based on its proprietary measures of financial turbulence and systemic risk:
- Financial turbulence measures the statistical unusualness of a set of returns given their historic pattern of behavior. Once they hit, periods of turbulence tend to persist, he noted.
- Implied systemic risk measures the extent to which markets are unified or tightly coupled. When markets are more tightly coupled, negative shocks propagate more quickly and broadly than when markets are more loosely linked.
In response to changes in the risk environment, Windham dynamically adjusts portfolio allocations for the appropriate Risk Regime.
“Risk Regime Investing™ seeks to provide additional diversification across an investment program through distinctive opportunities to capture excess returns and offer greater protection against downside risk,” said Kritzman. For select institutional investors, Windham acts as strategic partner providing risk management insight based on its proprietary research, he said.
About Windham Capital Management
Boston-based Windham Capital Management was founded in 1988 as an SEC-registered investment advisor. Windham is widely known for its pioneering research and its impact on the way institutional investors manage assets. Windham provides investment management for institutional investors, intermediaries and private clients. Armed with innovative research and proprietary risk management, Windham creates and manages portfolios and single-strategies to increase the probability of investment success in both calm and turbulent markets. Key inputs to this process are Windham’s proprietary risk measures, which reflect financial market sensitivity to changes in levels of market turbulence and seek to provide an early warning signal to fragile markets. For more information, please visit www.windhamcapital.com.