Investing in any form involves risks – there is no free lunch in the markets. Market fluctuations and unforeseen events can lead to financial losses. However, there are several proven risk-management techniques, such as stop-loss and diversification of portfolio, that can be used to limit losses.
Spotalpha automates several risk-management best practices which make investing safer. However, it is worth noting that even the most advanced algorithms cannot guarantee 100% risk management.
In the following image you can see the impact of Spotalpha’s stop-loss risk management system.
The area highlighted by blue indicates the time when the market started falling in early 2020, due to the fear of Covid-19’s impact. Spotalpha’s risk management system switched the allocation of it’s India market Mid-Cap Alpha Portfolio quickly from equity to cash. The portfolio was in cash for three months March-May 2020 before allocating again to equities. The maximum drawdown (peak-trough fall) for Spotalpha’s Mid-Cap portfolio during this time (first half 2020) was -6% compared to NIFTY-50’s maximum drawdown of -38%.
In the following image you can see the impact of Spotalpha’s sector-rotation risk management system.
The prices of several stocks are influenced by macro-economic cycles, such as farm produce or demand for crude increasing in winter. These factors act as head winds or tail winds to a stock price. Hence it’s prudent for any concentrated portfolio (which is not very diversified) to identify the macro-economic cycles. Spotalpha’s India Market Dynamic Alpha Trend is one such portfolio. It allocates to a maximum of 5 large-cap stocks. In the allocation area chart shown above, you can see how the algorithm switches allocation across sectors from time to time. You will also notice how the algorithm reduces allocation to equities in general and allocates more to cash (like in early 2020 and late 2022) when it can not find sectors that are broadly outperforming – these are times when all sectors are falling.
In summary, Spotalpha employs several algorithms to improve risk management and make investing safer.