At 3 Capital Partners, the investment process is constantly being refined, while adhering to a ‘purpose-driven, risk-based’ approach aiming to achieve long-term and consistent investment outcomes for their clients. Establishing a scientific, systematic, and quantitative way to analyze the risk of the overall portfolio and underlying holdings is one of the critical elements in their approach.
3 Capital Partners realized that it can be inefficient and labor-intensive to gather and process external manager strategies’ information with traditional tools. They needed a scalable and advanced solution that can seamlessly integrate with their investment process.
3 Capital Partners has partnered with Venn by Two Sigma to help with several key workflows:
- Portfolio Management Capabilities
- Portfolio Construction Processes
- Ongoing Manager Due Diligence Efficiencies
Strengthening Portfolio Management Capabilities
Venn offers seamless data integration with certain third-party service providers through an API connection. By leveraging Venn’s framework and capabilities, 3 Capital Partners can more conveniently assess and monitor their real-time risk exposure on multiple layers. The portfolio holdings and performance data are directly fed into Venn from a third-party portfolio management system on a daily basis.
Before using Venn, we manually uploaded our portfolio data to another third-party software for risk analysis, which only provided the headline Value at Risk (VaR) data for a portion of our portfolio (publicly-traded securities only). By establishing an API connection between our portfolio management system and Venn, we are now able to evaluate the risk of our portfolio on multiple layers (from holistic, sub-segment and security levels). In addition, we can systematically monitor and review our portfolio risk in real-time. The quantitative analysis, including factor exposures, risk statistics, simulation analysis data, provides us with ‘risk-based’ guidance to complement our qualitative ‘purpose-driven’ decision making and review process.
Enhancing Portfolio Construction Processes
Venn selects a parsimonious set of factors it determines to be most relevant to build its proprietary factor model. This enables 3 Capital Partners to identify and interpret the important inherent risk drivers in their portfolio, by only including factors determined to be the most relevant and intuitive.
Prior to using Venn, we relied on the traditional asset allocation concept (Fixed Income, Equity, Hedge Fund, and Private Equity etc.) to select suitable investment tools and to construct portfolios. Venn’s unique risk factor model equips us with new insights when selecting suitable investment tools in the universe and constructing a meaningfully diversified portfolio.
We have always strived to further refine our distinctive ‘purpose-driven, risk-based’ investment approach. Having Venn’s risk factor model allows us to establish a scientific and unique way to identify the risk exposure and determine the purpose of our investments, unconstrained by the traditional asset allocation mindset. From a portfolio construction perspective, stocks and bonds have always been considered as negatively correlated and hence the pair has been well-received by most investors as a good risk diversifier. However, Venn has long proven that certain high-yield bonds have significant exposure to the Equity factor, and it is unsurprising that these bonds may not be the optimal tool to diversify equity risk. Venn’s factor model complements the core of our investment philosophy well, where we seek to identify the relevant and critical risk factors - to achieve a meaningful portfolio risk diversification and a sustainable performance.
Improving Ongoing Manager Due Diligence Efficiencies
Venn provides a central repository with extensive fund data. 3 Capital Partners leverages Venn to efficiently evaluate third-party manager funds, either using Venn’s standard or easily customizable templates, significantly reducing the need for Excel and saving huge amounts of time.
Venn provides us a simple yet comprehensive way for funds/strategies evaluation. We can quickly put together and review a list of funds/strategies using a customized view.
In addition to comparing the performance of different managers via various quantitative metrics in a standard and systematic way, we also assess the historical risk factor exposure and performance of these managers on a rolling period basis to ensure that the managers have delivered consistent results that are in-line with their value propositions over a long period. This is what we emphasize on to deliver consistent long-term results for our clients.
Results and What’s Next
Venn’s advanced proprietary factor model, coupled with a systematic and highly customizable user interface helps 3 Capital Partners to quantify risk exposure on multiple layers, from portfolio to security level, thereby enhancing our portfolio analytics capability.
Looking forward, the firm wants to build an ecosystem of synergistic tools comprising client relationship management, portfolio management, portfolio analytics, and order management systems. 3 Capital Partners explains, “we want to maintain a level of flexibility to cater to our ever-evolving business development and investment needs. With the ecosystem of synergistic tools, we can build a more scalable business with stronger investment and execution capabilities to achieve the long-term objectives of our clients.”
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