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Inside the Risk Management Industry with Hedgeye's Daryl Jones




Daryl Jones is director of research at Hedgeye Risk Management in New Haven, CT. Benzinga Radio sat down with him to get an inside perspective on how sell-side firms direct their clients in high-volatility market environments. Partial transcript below.

On the tenets of Hedgeye's risk management strategy:

“Everything starts with the macro for us – that ultimately drives where we recommend people go in terms of sectors and companies. We have 27 global macro factors that we monitor, and we rate them in terms of relevance. So every morning the macro team focuses on this factors and how they change incrementally. [We] take these factors and correlate them to various asset classes. It sounds complicated but it ultimately gives us a few conclusions, and these conclusions are what determine our shifts in stance.

The big conclusion from our macro models is the importance of the US dollar over the last couple of years. The US has been inversely correlated to both equities and commodities, even global equities. Focusing on what the dollar is going to do, what the catalysts for the dollar are, has been way at the top of the list in enabling us to manage risk in all of the other asset classes. We're something like 19 for 19 in trade recommendations for the dollar. So we have really, I think, done a good job in honing in on that risk factor but also realizing that it's probably the most relevant risk factor in the market. But... at a certain point the relevance of the dollar will change.”

How do you manage headline and political risk?

“I think that question is fascinating because not only is there a lot going on but you also have a lot more information than you've ever had before. It's more independent research firms, more media outlets, and in the last couple of years what's really sprouted up is the individual investor and Twitter. And even more data sources, for that matter; more accessibility to emerging markets.

The biggest challenge is [figuring out] what's noise and what's important. We think that the media and a lot of that stuff tends to be noise, and where you really get your edge is [by] focusing on primary sources and primary data. People have opinions, the media has opinions, government leaders have opinions – but the facts are ultimately what will drive the fundamentals.

The lack of quality analysis is what creates opportunities. Sentiment, whether it be created by the media or the Twittersphere, also drives opportunities. At the end of the day it's behavioral finance and people that have a superficial understanding of companies and economies tend to mis-price asset classes and stocks.”

Are you seeing any quality analysis come from the Twittersphere, and is there a divergence there between it and the rest of the financial media?

“The challenge with Twitter is that at the end of the day you don't really know who is Tweeting. You don't know what their objective is. On the flipside of that, there seems to be much more of a willingness for people to be negative, or report facts. Broadly speaking [the media's] tendency is to be positive, whereas what you tend to see on places like Twitter is people who just want to get the investment call right.”

On current range-bound trading in the S&P:

"We had this view of a range-bound market for a while, and it has played out pretty consistently this year. Without the economic situation in the US getting better or a clear and definite resolution in Europe it's hard to see the market breaking out of its range. We don't necessarily see it breaking down dramatically, but I think you have this 10-15% range that people will we be able to play very actively.

In the US, housing isn't getting better, if anything it's getting worse, and employment is stagnant. The real positive is corporate earnings which, on the margin, will probably start to get a little more negative. And then in Europe, it's just a very dysfunctional political situation. While we're getting positive headlines lately, the reality of the resolution is that it's a very weak monetary union trying to do a massive Keynesian solution which is going to be very difficult to pass from a political perspective.

The only marginal positive is that if you're looking for a return, where else do you get it? That's why companies like McDonald's, which is a name we're pretty positive on, [have done well]. If you look at McDonald's vs. treasuries as an example, [McDonald's has given better yields].”


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