The past few weeks, and especially recent days, have undeniably been turbulent. Given this volatility, I wanted to take the time to provide you with a clear analysis and share insights from discussions I've had with various clients and prospects.

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Evaluating the Current Drawdown in Historical Context

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First and foremost, let’s focus on the key question: How have our Prisma Risk Indicators handled this drawdown compared to major past drawdowns? Below is a comparison of various S&P 500 drawdowns since 2008, illustrating how our indicators have historically mitigated losses:

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Performance computed from 15 Jan 2008 to 07 Apr 2025, inclusive of transaction costs. Our five main indicators (Vega, Macro, Credit, Crossvol, Net Liquidity) are equally weighted to form a Combined Indicator. The risk level of that Combined Indicator (R_CI in %) determines the daily S&P 500 exposure, ranging from 0–100% as follows: (100% - R_CI)

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So far, the current drawdown stands as the sixth-largest since 2008. Our indicators tend to be most effective when market drawdowns are severe, in line with our primary goal: limiting the deepest declines, which have the most detrimental impact on long-term returns. 

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A drawdown reduction of around 28% in the current environment is consistent with how our indicators have historically responded in similar circumstances.

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Beyond Simply Avoiding Drawdowns: A Balanced Approach

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Some might argue that avoiding market drawdowns altogether is easy: simply remain fully in cash. However, that approach also sacrifices significant growth potential. Our aim is different: reduce significant downside risk while remaining sufficiently invested to capture market upside. The table below compares the S&P 500 against an adaptive exposure based on our indicators:

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Performance computed from 15 Jan 2008 to 07 Apr 2025, inclusive of transaction costs. Our five main indicators (Vega, Macro, Credit, Crossvol, Net Liquidity) are equally weighted to form a Combined Indicator. The risk level of that Combined Indicator (R_CI in %) determines the daily S&P 500 exposure, ranging from 0–100% as follows: (100% - R_CI)

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Our results speak to the robustness of our methodology: Our indicators were able to deliver similar returns while having significantly reduced drawdowns (see first table) and volatility. 

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Addressing Potential Criticism: Post-Financial Crisis Analysis

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A frequent critique is that our strong results may stem largely from the 2008 crisis period. To address this, here is the same analysis starting after the crisis:

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Performance computed from 31 Dec 2009 to 07 Apr 2025 inclusive transaction costs. The indicators (Vega, Macro, Credit, Crossvol, Net Liquidity) are equally weighted to generate a Combined Indicator. The risk level of the Combined Indicator (R_CI in %) is then used to adapt exposure to the S&P 500 between 0-100% based on the following formula: (100% - R_CI)

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Even starting post-crisis, our indicators have successfully achieved comparable returns, but at a significantly lower level of risk.

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Setting Realistic Expectations: Indicators Are Not Crystal Balls

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Our quantitative risk indicators are designed to systematically detect shifts in market regimes; often described as capturing the “second derivative” in mathematical terms. That said, they’re not all-seeing; they will not reliably predict every idiosyncratic or event-driven risk (e.g., unexpected Fed announcements, earnings surprises, or sudden political developments). These types of surprises only show up in our indicators if the market begins pricing them in, as reflected in underlying data such as volatility, credit spreads, and related factors.

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By contrast, anticipating truly unanticipated events would require either insider knowledge or a high-frequency system capable of reacting instantly to every piece of global news as well as interpreting each development flawlessly. Consequently, our indicators are not well-suited for predicting surprises like the abrupt tariff announcement on April 2.

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For known or preannounced events (such as scheduled Fed meetings, major earnings releases, or anticipated political developments), some clients may choose to temporarily override the indicators. This helps maintain a more neutral stance, aligning their positions with broader, long-term asset allocation goals. In doing so, they can mitigate the risk of short-term underperformance, whether that arises from missed upside opportunities or losses triggered by announcements occurring during preannounced events.

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Handling Short-term Reversals and Recent Market Behavior

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A reasonable follow-up question is why we didn't immediately flag full risk on April 3. While it’s true that by examining the “second derivative” (i.e., changes in trend) we might have seen a strong trend shift, our indicators intentionally smooth the risk signal over one to two days. This approach helps us avoid getting whipsawed by the short-term reversals that often follow extremely negative days, a phenomenon well-documented in academic research. Historically, this smoothing has been very effective at minimizing noise from these powerful short-term reversals. On April 3, however, no such reversal occurred, which is why the risk signal was triggered shortly thereafter, rather than immediately.

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Disclaimer

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‍This content is advertising material. This content as well as all information displayed on any of Alquant’s websites does not constitute investment advice or recommendation, and shall not be construed as a solicitation or an offer for sale or purchase of any products, to effect any transactions or to conclude any legal act of any kind whatsoever. Past performance is not a guide to future performance.