The Axioma Worldwide Equity Linked Factor Risk Model (Linked Model) combines the Axioma United States Equity Model (AXUS4) with the Axioma Developed Markets ex-US (AXDMxUS4) and the Axioma Emerging Markets (AXEM4) Models into one interconnected equity model.
The Challenge for Discretionary Hedge Funds
Risk models are often built for a long-only world that fits neatly into geographic segments. This results in a poor fit to investing approaches unconstrained by client-driven mandates. Many managers have no choice but to compromise by using a global model offering full portfolio coverage at the expense of the factor granularity offered by regional or single country models where the majority of their positions trade.
For example, long/short equity managers with a majority of their positions in the US market but who also take a few speculative positions globally may get inaccurate risk and performance analytics, thanks to a set of factors estimated only at the broad geographic level.
The Linked Model is an interconnected equity model with full coverage of global markets but a regional factor structure that recognizes the differences in factor phenomena from one market to another. For example, rather than describing Price Momentum or the Specialty Retail industry as generalized global factors, the Linked Model considers Momentum or Specialty Retail in the US separately from the equivalent factors in developed and emerging markets.
This differentiation results in more intuitive performance attribution, better quantification of hidden biases in the portfolio, and the ability to accurately hedge exposures and better forecasting of portfolio volatility. Better identification and measurement of the factors acting on the portfolio leads to better understanding of its behavior.