Market Regime Analysis

Market Regime analysis

Under bearish conditions, the LLC manager has added value for the portfolio because his loss on returns on average is less than S&P 500. Under normal conditions, he is also over performing the benchmark. Under bullish conditions at 60%, he is able to catch the upside and over perform the benchmark. Overall, the market regime analysis reveals that the LLC manager is able to add value in different market environments.

Standard performance statistics:

The standard deviation for the LLC manager and the S&P 500 is identical at 4.7%, this means both have the same amount of dispersion surrounding the average. Looking as the skew, the LLC manager has a higher negative skew at -0.78, meaning there are larger negative extreme events than there are positive ones. The kurtosis is also considerably higher at 2.0 suggesting that the skew is caused by many negative outlier events (many negative returns). Looking at the Value-at-Risks for the 95% and 99% confidence interval, it shows that LLC manager has a 5% chance of getting a -7.3% return and 1% chance of getting a -10.5% return on the fund (which is a little bit better than the S&P 500). If you look closely at the actual worst 1%, you can see that the LLC manager is worst then the S&P 500 at -12.1%. Suggesting that fund has higher risks of losing money.

Market Timing:

After carefully analyzing "Market Timing" regression analysis, the report shows that the LLC manager has a 0.926 Beta in the Up market. The desired beta for the Up market is 1 or higher. Since he is close to 1, he is increasing risk taking in rising markets, but not to the point where we expect him to be. In the down market, the manager has a beta at 0.962. This is not desired because it shows that he is taking on more risks in falling markets. This is bad for the fund because there is a high risk that the fund can lose more money in falling markets. This LLC manager does not have excellent timing ability because his beta should be higher in the Up market and lower in the down market.

Factor Models:

Looking at the simple factor model, it seems that the LLC manager has an excellent annualized alpha over the given period of 3.36% and the R^2 is 89%. If we only relied on this analysis, we can conclude that the fund manager has skill and that they were able to provide superior risk-adjusted returns. But after carefully analyzing the manager's risk-adjusted returns under the multi-factor models, you can see that the manager's alpha is now -2.93%. R^2 is getting higher, therefore, explaining 98% of the fund's movements. Since alpha () is the fund's excess return once we adjust for the underlying risks that the fund manager had sensitivities