Harvest risk premium from investor sentiment: Why you need a “ROOF” over your head

If a traditional multi-factor investing approach isn’t quite working for you, we offer an alternative: Qontigo Risk-On Risk-Off (ROOFTM) Scores and Portfolios that align factor investing with investor sentiments and implementation.

What is ROOF?

  • By separately quantifying the demand and supply of risk from actual implementations, the ROOF Scores capture market sentiments (bullish or bearish) implied by observable investor behavior. The Scores allow us to construct optimal ROOF Portfolios that reflect these sentiments (Risk-On or Risk-Off).
  • This methodology takes into consideration factor exposures as well as sector performance
  • Axioma Portfolio Optimizer is used to ensure stock selection yields the desired factor exposures and to satisfy risk-management constraints, ensuring that all parts of the portfolio construction process are aligned with the objective of the strategy.

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ROOF Portfolios can be used for:


  • Passive implementation for strategic or tactical asset allocations (e.g., a smarter way to implement defensive strategies over traditional single-factor min-vol portfolios)
  • Hedging or completion portfolios

ROOF Scores can be used for:


  • Alpha shrinkage
  • Risk budgeting/risk analysis
  • Market commentary/portfolio performance reporting
  • Benchmarking and performance attribution of external and internal managers

Relative to traditional “multi-factor”, this approach aims to:

Address unintended sector- and stock-specific allocations, and the resulting returns which can dwarf target factor returns.

Reduce or eliminate the potential of single-factor dominance in a simple factor diversification methodology.

Avoid the misalignment between exogenous signals and observable investor behavior.

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Comparing Risk-Averse and Risk-Tolerant Sentiment

Observations begin on Dec. 23, 1987

ROOF Scores can be used to define the market environment, in essence creating a daily “Fear vs. Greed” scatter plot by plotting the two scores along the X and Y axes.

We define the lower right-hand quadrant as the Risk-Off zone with more risk aversion (i.e., Fear), and the upper left-hand quadrant as the Risk-On zone with more risk tolerance (i.e., Greed).

Those bookends are where we expect to see the most extreme market movements, whereas the middle quadrants are where neither sentiment dominates the other. When the market is in that zone, only small up or down moves are expected.

Exogenous market signals are sometimes completely misaligned with investor implementations

  • The most extreme Risk-Off day was as expected, October 8, 2008, during the height of the Global Financial Crisis.
  • But the most extreme Risk-On day since this dataset started over 30 years ago was April 23, 2020, when the Fed announced an unprecedented QE program immediately following the COVID-19 crash in March.
  • Prior to that date, the previous reigning extreme Risk-On day was January 10, 1992 and had most analysts at the time baffled as 1991 was a bad year for the economy.

“1991 was the year the nation’s economic problems worsened, and the nation’s stock and bond markets flourished. In their perverse way, stocks and bonds built a mountain of success on bad news.”

The Seattle Times, Jan 2, 1992

Analyzing investor sentiment during the COVID-19 pandemic

In 2020, despite Covid-19, fiscal and monetary stimuli led to a risk-taking market. Overall ROOF ratio is positive, accordingly the Risk-On index outperformed.

In 2021, as COVID fears waned inflation concerns heated up, and, equity investors were largely risk-averse, accordingly the Risk-Off index outperformed.