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Smart beta defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization based indices. Smart beta emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way. The increased popularity of smart beta is linked to a desire for portfolio risk management and diversification along factor dimensions as well as seeking to enhance risk-adjusted returns above cap-weighted indices.
A multi-factor model is a investment strategy that employs multiple factors in its computations to explain market phenomena and/or equilibrium asset prices. The multi-factor model can be used to explain either an individual security or a portfolio of securities. It does so by comparing two or more factors to analyze relationships between variables and the resulting performance.
Also known as Long/short equity is an investing strategy of taking long positions in stocks that are expected to appreciate and short positions in market instruments that are expected to decline. A long/short equity strategy seeks to minimize market exposure in challenging conditions, while profiting from stock gains in the long positions and price declines in the short broad market positions. Although this may not always be the case, the strategy would be profitable on a net basis as long as the long positions generate more profit than the short positions, or the other way around. The long/short equity strategy is popular with hedge funds, many of which employ a market-neutral strategy where the dollar amounts of the long and short positions are equal.
Dynamic asset allocation techniques are a portfolio management strategy that involves rebalancing a portfolio so as to bring the asset mix back to its long-term target. Such rebalancing would generally involve reducing positions in the best-performing asset class, while adding to positions in underperforming assets. The general premise of dynamic asset allocation is to reduce the fluctuation risks and achieve returns that exceed the target benchmark. Our dynamic strategies make use of a market overlay refered to as the AVMi to adjust the exposure to equities vs. fixed income instruments.
Sector rotation is the action of shifting investment over or underweight from one sector of the economy to another. Sector rotation involves the rebalance of securities related to a particular investment sector and using the funds garnered from that sale to purchase securities in another sector.
One popular smart beta style is low volatility. Low volatility indexes are geared toward investors who want to participate in the markets when they are moving up, but want to limit their downside risk a bit. Like most smart beta indexes, low volatility ones can be used as a core holding in a portfolio or to add low volatility equity exposure to fine tune the overall risk of the portfolio.
An absolute return index seeks to make positive returns by employing investment management techniques that differ from traditional index strategies. Absolute return investment techniques include using broad market short. Absolute returns are examined separately from any other performance measures, so only gains or losses on the index in question are considered.
Currency-hedged indices contains positions in currency forwards, which are essentially futures contracts on currencies. Forwards allow you to lock in the price of a currency today, regardless of eventual fluctuations. Currency forwards don’t fit the strict definition of futures contracts, because they don’t trade on exchanges.