HiddenLevers Portfolio Stress Testing Model Shines in Oil Crash

NEW YORK, NY--(Marketwired - Feb 13, 2015) -  Six years after a collapse in oil prices foreshadowed the 2008 financial crisis, investors and the financial professionals that serve them remain on high alert for similar unexpected and potentially wealth-killing events. 

A new White Paper (available here) by HiddenLevers, the premier portfolio stress testing platform, draws upon the 2008-09 financial crisis and the current Oil Crash, among other economic heart attacks, to gauge the performance of HiddenLevers own statistical model.

Key Findings

1. Model is accurate
HiddenLevers accurately projected (within 5%) impacts against stocks, ETFs, and mutual funds in 84% of cases studied. Accuracy was high in both amplitude and direction on 11 flagship securities analyzed, despite a breakdown in market correlations.

2. Model is versatile
HiddenLevers models performed well in a wide range of scenarios, including the 2008 financial crisis, the 1987 US stock market crash, the 1998 Russian default, and the 2014 Oil Crash.

3. Model can handle divergence
HiddenLevers allows users to adjust bond spreads assumptions, enabling successful modeling of bond fund performance in a divergent scenario like late 2014, where the S&P rose, bond spreads widened, and oil prices sunk.

Crude Awakening

Oil prices have been crushed since summer 2014. In the face of an underwhelming geo-political pop from Russia-Ukraine and the Islamic State, a mercilessly strong US Dollar, and a tug of war between North Dakota and OPEC, oil now hovers around the break-even price for shale oil.

In the Oil Crash scenario, HiddenLevers portfolio stress testing model successfully projected impacts for several flagship securities, including oil producers like Occidental Petroleum (OXY) and Exxon Mobile (XOM), large caps like IBM, ETFs like iShares Russell 2000 Index ETF (IWM) and iShares Barclays Aggregate Bond Fund (AGG), and mutual funds like Fidelity Contrafund (FCNTX).

"Since our inception in 2009, customers wanted back-testing -- proof that HiddenLevers regression engine worked," said Praveen Ghanta, HiddenLevers Co-founder and architect of the stress testing methodology. "The current Oil Crash presented a perfect opportunity to test our projected impacts against actual impacts, so we decided to lift up our skirts."

The macro landscape during this Oil Crash has been peculiar -- a rising market and widening bond spreads, while WTI and Brent Crude Oil were tanking. HiddenLevers portfolio stress testing model shined in the face of these divergences.

"It was a good challenge to showcase HiddenLevers against other stress testing models," said Ghanta. "Monte Carlo models have zero consideration of macro, and Value-at-Risk models can't account for such a divergent scenario, because it's just based on standard deviation."

Indeed, asset gatherers and portfolio managers relying on VaR were betrayed twice -- first by failed performance, and again when clients failed to comprehend output. HiddenLevers offers an understandable approach, akin to the Fed stress tests for bank assets -- with good, bad, and ugly outcomes around what-if scenarios.

"Why did HiddenLevers perform so well? Its big data," said Raj Udeshi, Co-founder of HiddenLevers. "The regression engine independently measures the sensitivity of each security against 130 economic indicators -- impacts are based on millions of calculations, not one proxy for a whole asset class."

"Especially for high yield bonds that had oil ties, interest rate sensitivity was telling the wrong story altogether," said Ghanta. "HiddenLevers gave a more accurate picture, combining impact from interest rate risk, oil prices, and overall market risk."

In HiddenLevers, an Isolated Oil Crash is now priced in, and financial professionals can use the platform to discover tactical plays for an Oil Bounce Back or hedges for a potential Commodities Perfect Storm.

Access the White Paper.

About HiddenLevers

HiddenLevers is quickly becoming the premier portfolio stress testing solution for both portfolio managers and financial advisors everywhere. The cloud-based platform includes a library of macro scenario research, portfolio stress testing, portfolio risk profiles, thoughtful client-facing output and an enterprise level risk monitoring. HiddenLevers is based in New York City.