A³ - AlphaSimplex Analytics Array

A³ is a proven methodology pioneered by Dr. Andrew Lo, Chief Scientific Officer at AphaSimplex [1] and the Harris & Harris Group Professor at MIT [2].  A³ is based on the Adaptive Markets Hypothesis [3], an approach that fills the gaps in the Efficient Markets Hypothesis, and which incorporates changing conditions into its dynamic analyses.

Investor Analytics is proud to offer A³ on our platform through our partnership with Dr. Lo.  A³ offers the following analytics:

Liquidity Analysis:

A³ explores new and innovative ways of understanding liquidity of managers and funds.  The auto-correlations of manager returns can be a most useful tool in detecting friction or fraud. 

[4]By analyzing the returns of the Madoff feeder fund Fairfield Sentry, we observe unnaturally high auto-correlations, a red flag for funds that supposedly invest in liquid securities.  This chart shows that the Madoff fund (which reportedly invested only in equity-like listed securities) has a very large auto-correlation, meaning that it's either invested in illiquid securities or that the returns are smoothed or otherwise adjusted.

Risk Decomposition:

A³ decomposes a portfolio into its driving risk factors and answers the question: "What are My Major Contributers of Variance?"

[5]

The chart to the right is a visulaization of the correlations between the drivers of the portfolio's risks.  High positive correlations are shown in blue (such as the diagonal going up and to the right), while large negative correlations are shown in red. 

The analysis also provides tools to assess how much the factors themselves contribute to a fund's volatility or whether the volatility is driven by covariances between the factors.

Loss Statistics:

The Loss Statistics report dives deeply into Tail Risk.  These analyses generate

[6]

the probabilities of losses associated with user-defined market scenarios: if the markets do x, y, and z, what is my portfolio's likely response? 

In each case, the A³ analysis shows the probability distribution of losses, given the market movements that you specify.  It also presents the probabilities of suffering 5%, 10%, 15% and 20% losses in the portflio during the user-defined scenario.

Performance Attribution:

This set of reports is a collection of the various types of Performance Attribution [7] and Performance Statistics that are common in the alternative investment world.  A³ provides detailed attribution of a manager's alpha and the multiple betas.

A³'s performance engine also provides a liquidity-adjusted Sharpe ratio, return attribution into each driving factor for all levels of the portfolio, and trackinng error.