It’s Not All in the Numbers When Assessing Downside Risk
Center for Financial Studies Industry Speaker Series
Mr. William Gordon
Chief Executive Officer, Dix Hills Partners, LLC
Reception immediately following the seminar.
When assessing its true downside risk of quantitative investment strategies, analysts and portfolio managers must look far beyond the data and return. Qualitative analysis and understanding the potential for “outlier” events can be equally important in assessing a strategy’s attributes and limits, including downside risk, volatility, scalability and consistency. In some sense, the quantitative side is easier, as it is more direct and calculated. However, it is the qualitative side that becomes the nemesis, resulting in an unexpected strategy meltdown from a multiple downside standard deviation performance event. Looking at all the data over multiple business cycles and market environments, factor stability, and many other statistical measures of consistency are all important. However, the study of the securities utilized, the underlying markets and how these securities are traded and employed in investor portfolios are equally important. Factors such as the instrument’s and sector’s liquidity, the diversity and breadth of buyer interest, the typical leverage employed by those players in the market in these securities are all essential to assessing such downside from outlier events. Periods in which uncorrelated strategies all go to 1 are ideal for proposed stress testing strategies, as these are the outlier events that can and do happen, which most managers dismiss as “unlikely”. However, it seems that the less likely an event, the more damage it can cause. While this analysis does not guarantee such a downside event will not occur, it can at least allow for proper strategy design and manager preparation in case of such an event.
Mr. Gordon is a founder and managing member of Dix Hills Associates, LLC and its affiliate management company, Dix Hills Partners, LLC and serves as the company’s client and business manager. He had been focused on developing investments for institutional and high-net worth investors before founding the companies in July 2003. Until January of 2001, Mr. Gordon was a managing director, institutional business unit at Mitchell Hutchins Asset Management, a subsidiary of UBS/PaineWebber. Prior to UBS/PaineWebber, he held positions at Merrill Lynch Capital Markets for over 15 years, working with Fortune 500 Corporation and institutions in pension/cash management, private equity, and traditional asset management. Additionally, he has held positions at Merrill Lynch in institutional marketing, prime brokerage/securities lending, and working with hedge funds and alternative investment strategies. A significant part of his career has been advising institutions, pension funds, and high net worth clients regarding investments and portfolio strategies. He has held several management positions overseeing business teams. Mr. Gordon holds a B.S. in chemical engineering from Rensselaer Polytechnic Institute and an M.B.A. from Harvard Business School.