Venn provides users with multiple ways to analyze the impact of historical, hypothetical and forward-looking drawdowns and rallies on individual investments and portfolios. In particular, Venn’s outputs include Historical Drawdown Analysis, Notable Historical Periods, Historical Drawdowns and Rallies, Hypothetical Drawdown Analysis and Scenario Analysis. These analytics can also be found within Venn’s “Stress Testing” template. Let’s walk through each use case and how one can use them to evaluate potential risk.
Historical Drawdown Analysis (Periods and Chart): "In which periods has my investment/portfolio experienced a drawdown in the past?"
These straightforward sets of analyses show all historical drawdown periods an investment or pro forma portfolio experienced over the timeframe of your choosing. Key metrics such as the current portfolio’s drawdown percentage, drawdown length, recovery period and benchmark performance provide a helpful snapshot for each period. Interested in viewing only extreme historical drawdowns? It’s easy to filter for a specific “Drawdown Threshold.”
You can also view the Historical Drawdown Chart to visualize how your investment/portfolio has drawn down through history. The line will be at zero if the investment or portfolio never entered a drawdown during the analysis period selected (i.e., values range between 0% and -100%).
Notable Historical Periods: “View the historical underperformance or outperformance of investments or portfolios during well known historical time periods, as identified by Venn.”
Select from a preset list of well known historical periods to identify if an investment or portfolio had either underperformed or outperformed given observed returns over that time period (e.g., The Global Financial Crisis, U.S. Taper Tantrum, Oil Price Shock of 2015, EM Melt-Up, Brexit, COVID-19 Crisis, and more).
Historical Drawdown and Rally Scanner: “When has my investment or portfolio experienced outsized underperformance and outperformance?”
Enter in a threshold to see all the periods that an investment or portfolio underperformed or outperformed a given threshold, throughout its history. Use this to better understand when and how often tail events occurred historically.
Find out more by checking out our FAQ: Historical Drawdown and Rally Scanner.
Hypothetical Drawdown Analysis: “Which historical periods would have resulted in a drawdown given my investment’s or portfolio’s recent factor exposures?
Hypothetical Drawdown Analysis was designed to help investors understand which historical periods, if repeated today, could create a drawdown in a portfolio or investment, given the latest factor exposures as determined on Venn.
Be sure to click into a given period to find out more information such as: the shape of the hypothetical drawdown period, a snapshot of that period’s market environment, and how the factor exposures, strategies and investments may have contributed to that drawdown.
Find out more by checking out our FAQ: Hypothetical Drawdown Analysis.
Scenario Analysis: How would my investment or portfolio be impacted by a future market shock?”
Scenario Analysis is a forward-looking tool that shows you what a shock to a particular index might mean for your investments and portfolio. Select from over a dozen scenario options and input your projected scenario return. Venn calculates the sensitivity of the scenario index’s returns as well as the portfolio’s or investment’s returns to the factors in the Two Sigma Factor Lens. By translating each return into the shared language of factor exposures, Venn can then estimate how a shock to one (here, the scenario index) would likely affect the other (the portfolio or investment). When entering more "extreme" shocks to the scenarios (i.e., greater than 2 standard deviation events), Venn uses a proprietary machine learning-based approach to regime modeling by sampling from the distributions of certain market conditions. You can learn more about our approach here.
Check out our FAQ: Scenario Analysis for more information.
This document highlights certain aspects of this feature. As an overview, it does not discuss all material facts or assumptions. Please see Important Disclosure and Disclaimer Information.
This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed. The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment. This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time. Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. Click here for other important disclaimers and disclosures.