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Axioma Worldwide Equity Linked Factor Risk Model

For Global Asset Managers

Finally: One equity risk model for portfolio construction and risk management

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 Global Asset Managers

Portfolio managers assigned to domestic or regional mandates may use a risk model estimated from the particular geographic region corresponding to their mandate while those tasked with monitoring firm-wide risk and performance used a more generalized risk model to ensure they are able to capture all the firm’s portfolios.

This may lead to confusion and miscommunication between the portfolio managers using a more granular factor lens to construct and analyze their portfolios and the risk managers using the more generalized factor structure to identify where risk was allocated and what was driving performance.

The Solution

The Linked Model is a risk model with full coverage of global markets but with a regional factor structure that recognizes the differences in factor phenomena from one market to another. In this way, asset management firms benefit from a fully consistent structure without any tradeoffs. A single model allows for portfolio managers and risk managers to have an identical view of the domestic or regional strategies while still allowing the flexibility for risk managers to combine portfolios for an aggregate view of the firm’s overall book.

Global Model with a Regional View

Benefit from a global model that captures regional factor structure nuances.

Discretionary Hedge Funds:
Don’t sacrifice accuracy in the name of coverage

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.

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Global Quant Funds:
Better estimates of global equity risk through regional sub-models

Traditional global equity models have to make assumptions regarding the homogeneity of factor behavior over a set of disparate local and regional markets. However, markets trading at different times during the day representing different investment opportunities sets create unique factor behaviors in each market. A generalized model of global equity may average this factor behavior which can have consequences in terms of risk forecast accuracy as well as risk-adjusted performance.

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Global Asset Allocators:
Aggregate regional risks from the bottom up

Global risk models offer the convenience of a single model, but they may also miss local factor nuances and key diversification benefits available between different markets that are important to understand total global equity risk, relative to a policy benchmark or in absolute terms. The only available alternative was to use several individual regional models to capture these nuances – impractical from a cost and efficiency perspective.

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