Axioma offers fundamental linear, cross-sectional, multi-factor risk models.
2. How did Axioma develop its risk models and how extensively were they tested?
Axioma acquired the risk model and performance attribution components of Goldman Sachs Asset
Management’s Portfolio Analytics and Construction Environment (PACE) in 2005. This acquisition—and the
many years of research and development that went into it—served as the starting point for Axioma’s Robust
Risk Models. During the development process, Axioma sought the assistance of a group of seven firms,
representing the plan sponsor, hedge fund, fund complex, and broker/dealer community. This group,
referred to as our “charter members,” tested Axioma’s models against internally developed and commercial
third-party risk models to help Axioma ensure the competitive quality of the models. As a result, Axioma’s
Robust Risk Models reflect the input and insights from 40 highly regarded investment professionals.
3. What makes Axioma’s risk models different?
Axioma’s models bring three significant innovations to the marketplace: methodological transparency, the
patent-pending Axioma Alpha Factor™, and fully updated daily risk estimates. No other risk models on the
market today offer this combination of state-of-the-art features designed to satisfy the needs of such a
broad range of clients, from quantitative to fundamental.
The transparency of Axioma’s risk models provides a clear definition of both the model risk factors and how
they are computed. This departure from conventional ‘black box’ approaches gives clients greater insight
into their sources of risk because the model factors are known precisely.
4. What is the Alpha Factor?
The Alpha Factor™ is Axioma’s patent-pending approach that significantly improves risk forecasts of factor
risk models. Using the Alpha Factor mitigates the effects of risk underestimation, a common problem that
occurs with risk models.
5. How much history is available for each model and what is the update frequency?
More than 10 years of history is available (from January 3rd, 1995). Data on exposures, factor returns and
covariance matrices are updated daily to ensure timely adjustments to changes in market volatility.
6. How many factors are included in the model?
Axioma’s Robust Risk Models™ include 76 factors, among them 8 styles: Market Cap, Volatility, Turnover,
Momentum (Short), Momentum (Medium), Growth, Value & Leverage.
7. How does Axioma define the investment style factors?
Market Cap: Normalization of the log of the 20-day average market cap. Volatility: The square root of the asset’s absolute return averaged over the last 60 days,
divided by the cross-sectional volatility of the market. Turnover: The natural logarithm of the last 20-day average volume, divided by the natural
logarithm of the last 20-day average market capitalizations. Momentum (Short): An asset’s cumulative return over the last 20 trading days. Momentum (Medium): An asset’s cumulative return over the last 300 trading days,
excluding the last 20 trading days. Growth: The product of one minus the dividend pay-out rate and the one-year return on equity. Value: The ratio of common equity to the current market capitalization. Leverage: Total debt divided by market capitalization.
8. What is the coverage?
Axioma’s Robust Risk Model™ for the U.S. covers 11,000 equities, including ADRs.
9. Over what time period does the risk model forecast volatility?
The Axioma Robust Risk Model™ is ‘tuned’ to forecast risk over the next three months. The units of risk
are a standard deviation of annual return. Those standard deviations are re-estimated daily with the goal
of forecasting volatility over the reasonable holding period of our clients’ portfolio constituents.
10. How is the covariance matrix computed?
We use a 125-day half-life for the exponential weighting of asset and factor returns, and up to five years
of history of factor returns to determine the factor covariance matrix.
