Implementation Of Omega Point by A Tech-Focused L/S Asset Manager
THE SITUATION
Background
Long/Short Asset Manager ("LSAM") is an asset management firm based in the northeast USA, founded in 2012. With roughly $500 million in assets under management, the firm is a long/short equity investor in small- and mid-cap stocks in the technology sector.
“Rigorous fundamental analysis, low beta, and low factor risk drive our investment strategy,” said the firm's Portfolio Manager, CIO, and founder. “We used several high-profile platforms early on to help manage our factor exposure but found that each had limitations. It became increasingly evident that we needed a more robust and sophisticated solution to help manage our factor exposure in what was becoming increasingly correlated and volatile global markets.”
LSAM initiated a search for a new solution provider and identified several candidates, including Omega Point, which was recommended by one of LSAM'S institutional allocators.
About the Asset Manager
The foundations of LSAM'S strategy trace back to its Founder's 20-year experience with investing in technology companies.
“The technology sector possesses the highest average annual dispersion amongst all industry sectors,” noted LSAM's founder. “This dispersion typically results in a tremendously wide spread between winning and losing stocks, irrespective of sector performance overall. With our focus on small- and mid-cap technology stocks, we need to be adept at understanding and embracing idiosyncratic risk so prevalent in the sector. Consistent with our rigorous risk controls, we aggressively minimize factor risk across our portfolio and never engage in speculative factor bets.”
“Our value proposition to investors is a portfolio with a beta close to zero, near-zero correlation, and high alpha. We don’t use any leverage,” pointed out LSAM's founder.
EXPERIENCE WITH OTHER PLATFORMS
“Before LSAM, I came of age with the Barra factor risk management system,” LSAM's founder recalled. “Barra was an original player in this industry and certainly the first to cleverly think about factor risk in the equity world. That was where I first cut my teeth and started to learn to appreciate factor risk and get more sophisticated with it. It had its limitations, so when I founded LSAM, we did some deep thinking and searches, and frankly, we just weren't that excited about any one package. We also had a Bloomberg terminal, which we used for factor risk in the early days. It was better than Barra in different ways, but each had its benefits and limitations. It was a similar situation with other vendors we’d tried.”
“For example, one of the vendors we used had only one view of momentum,” LSAM's founder observed. “There was no delineation between short-term, medium-term, and long-term momentum. We’re far more concerned with short-term momentum as a factor risk than medium-term momentum, so only cutting it one way doesn’t help us much. We certainly monitor both but with that vendor cutting it only one way, what they deem a momentum stock would not be entirely inaccurate.
However, from a measurement standpoint, it’s incorrect in that it would completely underestimate how critical and essential the measurement of short- term momentum is and come up with metrics that didn't make much sense when thinking about momentum.”
Additionally, these platforms didn't allow LSAM to quickly identify oversold and overbought factors, which play a crucial role in its day-to-day risk management practices. The factors being tracked were also limited, omitting key indicators to LSAM such as short crowding, and foreign names typically contained significant errors.
“Another platform was especially frustrating in that you would see the stated equity factor risks of a specific stock change too quickly,” LSAM's founder sighed. “For example, a stable, traditional blue-chip stock such as IBM generally has a group of low factor risks around say momentum or volatility.
IBM would then report earnings, the stock would move up or down 7 or 8 percent, and the following week you'd see a 100% increase in what the vendor thought were some of the factor risks around IBM. This approach lacked the savvy that such a stock is going to experience some volatility around its quarterly report, but in essence remains a relatively stable, low factor risk name.”
One particular platform contained an irrational added-risk premium to non large-cap stocks. “Small-cap names are riskier than large-cap names, and mid- cap names carry more risk than large- cap names,” LSAM's founder reminded. “However, it was very askew within that system. Also, there were serious holes when it came to new issues. I’ll admit that new issues are challenging in factor risk management because there's no real history, but you can put in informed plugs, which are infinitely better than zeros. Also, we felt that most of those vendors were not adequately evolving their products, nor were they able to accurately measure the increasingly complex risks we saw in the markets.”
HOW THEY FOUND OMEGA POINT
“So when we launched and started doing reasonably well, we decided to evaluate our factor risk management system of record to see if there was something better out there,” LSAM's founder explained. “We sniffed around and asked industry people what they thought some of the more exciting and innovative products were. We also did some Google keyword searches on risk management, factor risk, and other related terms. We found some interesting vendors along with Omega Point, which came to our attention by an allocator within pretty sophisticated circles.”
“I then did a ton of research on Omega Point,” LSAM's founder recalled. “The first thing that impressed me was Omega Point CEO Omer Cedar’s background, notably his role at Two Sigma, which is a proprietary quant firm usually several steps ahead of the pack within that world. That certainly stood out to me. We then reached out to Omega Point and were able to connect with Omer. It was clear he understood factor risk inside out and was instantly able to answer even my most complex questions. Now Omega Point had my full attention.”
TRIAL AND TESTING
“We went through extensive testing of the Omega Point system during our trial,” LSAM's founder pointed out. “At the time, we were still in diligence with other vendors, but it became more and more apparent that this was a no- brainer decision. Towards the end of that first month, we decided to go with Omega Point. After hashing out some commercial terms, we went ahead and signed an agreement.”
INTEGRATION OF AXIOMA FACTOR DATA
“Further supporting our purchase decision, Omega Point’s integration with the Axioma factor data was especially important because we invest globally,” LSAM's founder emphasized. “We increasingly became convinced that Omega Point married with Axioma data was far and away the absolute best factor risk management system we could put in place. We needed the appropriate base to regress the data to get an accurate picture of factor risk in our global portfolio. So having access to the Axioma data, along with Omega Point’s enhancements intuitively layered on top of the data, was undeniably compelling. Omega Point’s U.S. factor data can also do a lot of really cool things if your strategy is domestic, but for us, the Axioma data set was more relevant due to our global portfolio holdings.”
“If the partnership between Omega Point and Axioma wasn't in place, there's a good chance we would have contracted with both firms and tried to marry it ourselves,” LSAM's founder divulged. “However, it was an enormous convenience that the partnership was in place, and the software and data were already seamlessly integrated.”
ONBOARDING & TRAINING
“Our CFO worked side-by-side with Omega Point’s support team to help upload and test our portfolio in the system,” LSAM's founder explained. “Once the team completed all tests to our satisfaction, I started to kick the tires on it aggressively. Our CFO was instrumental in ensuring that all the data was accurately in place so that we could perform an extensive test and assessment of the system.”
“Training was very hands-on, professional and precisely tailored to our needs,” LSAM's founder continued. “Included were several long conference calls with senior management to review my long lists of questions, which they thoroughly and thoughtfully covered. I was quite surprised that this implementation and training phase was so smooth, especially based on my experience that it's usually quite tricky to onboard a reasonably sophisticated and complex piece of software like Omega Point. Onboarding was a relatively painless process, and the support staff at Omega Point were useful in helping me get up to speed to be able to access and manipulate the data that I needed. As a prospective customer, they were phenomenal in helping me conduct a thorough assessment of the product. Once I was an actual customer, they made sure to get the product to a stage where it was even more useful for me. Unlike other experiences I’ve had, there was absolutely no drop-off in the availability of senior staff and other resources once we signed the contract and were up and running.”
USER EXPERIENCE
IMPLEMENTATION OF OMEGA POINT
“The platform is incredibly intuitive,” LSAM's founder marveled. “It would be foolish to assume it’s as easy to use as a simple website with a few self-evident buttons to click. It was intuitive, but not a complete no-brainer where you look at it, and immediately get up and running. There were still aspects I needed to figure out about how to get the most out of this very robust platform, what they all meant, and how they interplayed with each other. It didn’t take long for me to get reasonably proficient with even the more sophisticated features.”
“I’d say in the first month I was comfortable with 75% of the functionality. Within two months, I became more comfortable with the rest. It probably took two months because of my tight bandwidth at the time. I used and tested the platform whenever I could, gently hammered support about how to get maximum efficiency out of the platform, and had several calls with the CEO. However, there are many features that we're still discovering and figuring out.”
PLATFORM UPDATES & ENHANCEMENTS
“Just when I feel like I’m 90 - 95% there, they then roll out significant value-add enhancements, pretty much on a monthly basis,” LSAM's founder sighed. “So the learning process never really stops, and that's a good thing. I can never say that I’m 100% there, and that’s what I want because that means the product is never static.
“I was astonished by the fast-paced rollout of enhancements and features they've added since we started. Many of these were not even part of our diligence process because they didn't exist yet! There was just faith that some of these enhancements might eventually come. The new features have helped us even more than I thought they would. Their optimizer is even more useful and robust than I realized at the time, especially with all the different types of scenario testing we can now do.”
“One of the many things we were so excited about with Omega Point is the openness they have to our feedback on how they could improve the product or add enhancements to best suit our needs,” said LSAM's founder. “Omega Point takes a very collaborative posture by openly discussing their product roadmap and how our suggestions fit into it. If it isn't improving in ways that I need right now, I know they're at least thinking it through and taking in my suggestions for future versions.”
ACCESS & DATA SECURITY
“Convenient access and security certainly factored into the laundry list of things we liked about Omega Point,” LSAM's founder affirmed. “It was especially huge for us that Omega Point is a SaaS browser-based system. Not only is that much more convenient, but as tech investors, we know that's certainly the future. There's a clear reason why this is a megatrend; it's just a much cleaner way to do business in so many aspects. Plus we didn’t need to hire an in-house team to run it. So that was very important to us. Security wise, during the diligence phase we looked into security and encryption around the product and protecting our data, and we became quite comfortable with all those aspects. Omega Point hosts it with the best security protocols out there. By the time we launched, there was no concern at all.“
INTEGRATION INTO EXISTING WORKFLOW
“We needed to iron out upload and extraction of the data into the system, but that's normal in the first month,” LSAM's founder asserted. If you're not just doing pure straight vanilla equities, it can get a bit more complicated. The majority of what we do involves pure vanilla equities, but we also engage in more complex strategies including hedging via baskets of swaps. That complicated things slightly, but it was not an arduous process at all. Omega Point was able to seamlessly integrate with how we previously incorporated risk management into our portfolio management and stock selection process.”
USAGE
MONTHS 1 & 2
“We had no significant concerns early on other than the mild natural stress of implementing a new system,” LSAM's founder declared. “It's a substantial amount of data that we needed to upload, and we had to make sure that data was accurate. It's just the natural hesitations that this is going to be a little bit of a learning curve and a process. We expected that it would take a month or two to grease the wheels and iron out any kinks, and in hindsight that was pretty accurate. We were 100 percent sold; the only concern I had was that for a month or two we were going to be in a transition phase because I prefer to have a single factor risk system of record. During this phase, as we were getting all the data uploaded and making sure we understood the metrics, we continued to use another platform as our measurement engine. Once convinced that any loose kinks were ironed out, we then cut over and said, okay, starting today our new system of record is officially Omega Point. We have not looked back since.”
DAY-TO-DAY USAGE
“We look at Omega Point every morning before the open,” LSAM's founder offered. “Once we upload our portfolio into Omega Point, I spend time before the open looking at what's our overall idiosyncratic factor risk. Peeling back further, how has that broken down? How has that changed since yesterday? How are new potential additions to the portfolio or the scaling in and out of positions going to impact those various factor risk metrics? So it's part and parcel of our daily process.”
REPORTING
“We pluck specific Omega Point metrics and include them in our reporting, providing our investors a certain level of insight and transparency that stands out,” LSAM's founder stated. Omega Point recently released an API, so we are hoping to use that to integrate even more reporting metrics as well as make the current process a lot less manual.”
CUSTOMER SUPPORT
“Support is pretty cool,” noted LSAM's founder. “There's a button on the website that I can click, and I immediately get chat support. There's also an encyclopedic help function on the site where if it's something definitional, I can quickly reference that. I can understand that on my own through the chatbot. If it's something more complicated, I can set up calls with product specialists, engineers, and executives. It's a very well thought out customer service model they have. With some vendors we’ve used, there's an 800 number with extended hold times unless you’re their biggest customer. This is a well thought out escalation mechanism where at first it's automated, self-service, self-help and only when you know there is an actual conversation needed, does it escalate to that point. However, it isn't cumbersome to get to that point either. It's one of the better customer service systems I’ve ever experienced.”
OVERALL ASSESSMENT
Omega Point is the most accurate and sensible factor risk management system of record that we could find,” LSAM's founder asserted. “I’ve spent many years as a practitioner thinking about where the risk in my book is, and Omega Point’s factor risk measurement approach is by far the most accurate and thorough system of record we could find for factor risk measurement and management.”
“Secondly, we’re tech investors who have spent many years investing in data analytics and big data, which is a vast area where we've seen a ton of enhancements and innovation in the tech world especially around the visualization and the presentation of data. Omega Point has that nailed, and that is where Axioma is fortunate to have them as a partner because no one else has created such an intuitive and robust visualization engine as they have.”
“Thirdly, I'd commend Omega Point’s ability to expand upon what is a relatively rigid set of metrics that Axioma uses, similar to but better than other data providers like it. Those metrics are the key metrics but the world often works in fat-tail statistical ways, so we want to see a lot more metrics to decide how important some of those other metrics may or may not be. So Omega Point offers a far more comprehensive view of fat-tail factor risks, an example I had mentioned earlier is a short interest in a stock. Additionally, what I refer to as a factor risk “savviness” signaling mechanism, which is just a long-winded way of saying that Omega Point allows us to see which equity factor risks are overbought and oversold. Regarding pure statistics, one standard deviation overbought, two standard deviations overbought, those are incredibly valuable signaling mechanisms, akin to red light / green light for us. For example, let's say that we're running, with the momentum bias that's within our allowable bands of how much momentum we would allow ourselves. So at that very moment, we think we're okay because we're within our permissible bounds. Regardless of how we measure momentum, Omega Point will signal that it's more than two standard deviations overbought. That provides a tremendous degree of visibility, factor awareness, and “savviness” to our process. No other product we know of is doing it or at least does it in an intuitive, easily visualized way.”
“Finally, Omega Point also has an excellent, multi-goal optimizer in it. We don't just raw optimize our portfolio; we think we optimize it, but there are a lot of fundamental inputs that go into it as well. We use it as a discussion generator for factor risk tradeoffs. It is an optimizer for us, but what it's doing is it's allowing us to intelligently think about what is the most efficient use of the factor risks we're taking. Is our conviction in Stock A similar or higher than Stock B? Is it more palatable regarding factor risks within the context of our overall portfolio? So Omega Point has several very smart optimizers where we can optimize the efficiency of the factor risk we're taking as well as incorporating the savviness of factors that are a little bit overbought or oversold.”
“Omega Point is mission-critical to our business, and we’d certainly recommend it to any investment firms that are serious about managing their factor exposure,” points out LSAM's founder.
“With the benefit of hindsight, the frustrations we experienced previously with other vendors are now long behind us,” he added. “These vendors didn’t provide the substantial list of additional factor risks you easily see in Omega Point, nor any sophisticated optimizers where you can optimize for different types of factor risk control, nor what factor risks are overbought or oversold. Omega Point’s overbought/oversold signaling mechanism is an enormous enhancement versus anything else available in the industry.”
“People ask why we don’t just use the factor risk package in Bloomberg since we already pay for their terminal. Sure, with Omega Point we pay a premium for a separate decoupled risk management package outside of Bloomberg. However, as I like to say, a Bentley costs more than a Fiat for a reason.”
CUSTOMER'S TOP 5 ATTRIBUTES OF THE OMEGA POINT PLATFORM
- “Omega Point provides the most accurate and thorough measure of factor risk and individual factor risks.”
- “No one had a browser-based visualization engine, which we’ve found to be extremely helpful to produce more clear and insightful reporting metrics.”
- “No one else has created the breadth of additional factor risks we could look at on top of an Axioma. Other products were more isolated toward much more standard “top 10 equity factor risks”, and that's it.”
- “No one else had the factor savvy signaling mechanism, meaning what factors are oversold or overbought. Other vendors do it, but they just aren’t doing it in a clean and statistically accurate way as Omega Point does.”
- “The Omega Point optimizer was much smarter than the others. By smart, I mean you can solve for several different types of factor risk efficiency endeavors you were trying to accomplish. Other competitors were just much more rigid, offering more traditional optimizers that didn't allow you to solve for the different vagaries of how you want it to think about factor risk and control it.”
