[Investment technology tackles the tough but essential question of how adequate, or inadequate, conventional research, analytics, and status quo investment tools and processes are helping investment managers steer through the risks in a dynamically changing market.

InvestTech looks at how fast-changing global events, ever-deepening complexities, and multiplying uncertainties make traditional market analysis, experts’ opinions, and investment theories insufficient at delivering alpha. It also acknowledges and works to address the overwhelming noise and confusion wrought by short-term volatility.

One senior InvestTech leader, Rocco Pellegrinelli, Founder & CEO of Trendrating, is ringing the clarion bell signaling that it is increasingly important to “stop wasting time with inadequate information and pragmatically focus on the verifiable facts of what market and price trends are telling you”. He is calling for a “greater respect” for medium-term price trends and has engineered an innovative trends-allocation investment methodology and research technology designed to provide more reliable market intelligence for alpha creation.

We reached out to Rocco Pellegrinelli and asked him questions to learn more about his new market intelligence research tool and differentiated investment management perspectives that he developed to support his 300+ institutional clients and asset managers globally.]

 

Hortz: Can you explain the thinking behind the development of your trends allocation investment methodology and research technology?

Pellegrinelli: There are three key points at the base of the trends allocation methodology:

First, there is the guiding principle that risk control is a must-have for every active investor. It is of paramount importance. Unfortunately, the experience of many managers is that they cannot control risks as they would like. That is because traditional risk control methodologies and tools were not designed for, or do not have the research capacity needed for, the current evolving market environment.

Second, to address this risk control challenge, we have developed a different investment perspective focused on controlling the exposure to falling stocks and the research technology to support it. We see a key determinant of portfolio risk control as controlling the exposure to falling stocks, limiting the allocation to losers, and we developed an AI-powered research methodology that captures - in a very visible way - bull trends versus bear trends in stocks and sectors. The idea is to finally provide another angle of analysis that goes straight to the point of avoiding losers and limiting exposure to negative trends.

This risk control methodology is of utmost importance because you never know how far a stock correction can go. Nobody knows how much damage can be produced. In other words, even if there is already some damage, it can become bigger. Also, what is interesting for investment managers is that this research capability can compare the percentage of stocks that are falling in their portfolio against those in the benchmark. And if you can reduce the percentage or exposure to stocks trending down early, that can help your performance against your benchmarks.

Third, we specifically designed our research platform structure and investment technology to isolate, verify, and measure trends quickly and reliably, through a few clicks, and without relying on the added time of using multiple screens and data resources for your analysis. This data and research structure makes this risk control process easy and fast versus the alternative for a manager to calculate their momentum metrics every single day, one by one, and the following day, to have to do the same. So, it is a combination of a smart concept, innovative investment technology, and offering managers a new way to grab more risk control intelligence that goes straight to the problem of reducing exposure to falling stocks.

Hortz: Can you further explain the technology behind your new trends allocation methodology?

Pellegrinelli: Trendrating has invented a new investment methodology and technology to control the portfolio allocation to falling stocks using an advanced rating of actual medium-term trends.

Our advanced, AI-powered multi-factor model measures the buying vs. selling pressure of over 17,000 stocks worldwide, as money flows create and define price trends. Strong trends, including bull markets, are captured by an A and B rating; weak trends, including corrections, are signaled by a C and D rating.

We then engineered our research platform around the ability to enable rapid trend allocation analysis, which can help managers discriminate and allocate their investments across positive and negative trends. Analyzing these trends is important because, at the end of the day, performance is the result of the combination of trends you have in your portfolio. Reducing the portfolio exposure to falling securities is the most effective way to control risks and limit losses.

Tracking the evolution of the percentage of positive vs. negative trend ratings can also offer an objective picture of the breadth of the market. Our model records growing weakness as more stocks begin to correct. At the end of August, the percentage of falling stocks was around 30% for US large-cap and mid-cap stocks. Today, in late October, we report 48% for large-cap and 51% for mid-cap stocks. The performance dispersion across stocks is evolving toward a very selective market where the risk of holding underperformers in a portfolio is increasing by the week.

 Hortz: Can you further explain how investment managers can more effectively manage market risks with this trend allocation methodology and research platform?

Pellegrinelli: From my perspective, I have to ask what is the actual value of a risk-control process that does not measure and limit the share of weak holdings? The usual risk management methodologies and tools are not designed to control and avoid the most important risk of “trend risk” – the risk of holding stocks developing into a bear trend. The importance of trend allocation control is rarely considered. We invented the models and research tools to finally access this layer of portfolio intelligence.

Our technology offers the analytics to calculate:

• The risk rating of the trend for every security in the portfolios.
• The aggregated percentage of all the stocks in the portfolios, divided into A/B positive vs. C/D negative ratings.

Therefore, a systematic assessment of “trend allocation” of a portfolio can objectively measure the percentage exposure to negative stock/sector trends and is a pragmatic and logical solution for enhanced risk management and alpha discovery. This then makes it possible to reduce the percentage of portfolio risk in a portfolio by deliberately lowering the weight of C/D rated stocks or sectors. Trend allocation analysis fills an important gap in investment intelligence.

For professional investors whose mission is beating a benchmark, our system makes it possible to compare the trends allocation between the portfolio and the benchmark. It is then possible to optimize the portfolio in such a way as to hold a lower percentage of weak stocks compared to the benchmark, increasing the opportunity to outperform.

Hortz: Any final thoughts you would like to share with us?

Pellegrinelli: Some investors miss recognizing the importance of including sound trend analysis as part of portfolio management. Others use conventional data and tools to validate specific stocks but cannot get control of the big picture - the aggregated negative trend risks of the portfolio.

We are introducing a new paradigm, a new metric, a risk-control system, and ongoing monitoring to prudently check your trend exposure with advanced trend allocation metrics. It’s not about being right all the time. It's not about capturing every single movement. It's about the broad picture. As you have different stocks in the portfolio, as long as you can eliminate a good part of the losers, you can position a safer portfolio.

And to people who are focused on capturing individual stocks, we say, "That's not necessarily going to make a difference. It is not one stock that makes a difference in your portfolio. The difference you make is by holding as few stocks as you can that are falling into serious downtrends and certainly less than the index.

Our mission is to provide a new paradigm of actual, measurable value to professional investors that need and deserve better investment intelligence. We have the solution to the limits of conventional risk-control data. We are happy to invite and offer investment managers extended free trials to demonstrate and prove with facts how our advanced AI trends allocation analytics and alpha discovery research platform can provide enhanced market intelligence, strengthen risk management, and improve investment performance for any manager, using any investment methodology.

 

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