One of the powerful consequences of having our understanding of risk diversification is that we can calculate how many independent exposures are driving the returns of a single security within a specific investment universe. That is what we define as the fragility or robustness of a single security, which we turn into a practical 1 to 5 score for investment purposes.

To put it another way, it is an approach to quantify the quality (as oppposed to the level) of volatility for single securities.

Why is that useful? Here’s an illustration: imagine an object hanging from a fixed point by a single thread and another similar object hanging from five separate threads. Now imagine that both objects are thrown up and down in the air constantly, with varying levels of intensity. If you were to bet on the first object to fall to the ground, which one would you pick? One would expect that, if the threads are of the same quality, a single thread would fail before five do. The opposite is not impossible, just much less likely to happen.

Hence was born the idea of using this score as a predictor of performance for baskets of securities: because we don’t know which one will fail or which one will hold, we cannot bet on individual positions. For example, knowing that Roper Technologies (ROP) has a score of 5 and Tesla (TSLA) a score of 1 isn’t enough: with single stocks, anything can happen in the short to medium term. But we can bet that, on aggregate, fragile securities (Fragility/Robustness score = 1) will do worse than robust ones (Fragility/Robustness score = 5). The rankings are dynamic and the scores change over time (although they are pretty stable in the short term), leading to repositioning of those bets.

We tested this hypothesis cleanly, out of sample, on US equities, and will publish more research with different asset classes over time.

For now, we are covering the top 1,000 US-listed equities, US-listed ETFs (full universe as well as broken down into sub-universes), currencies, commodities, cryptos, and we are updating daily a US equity long-short allocation.

In order to better align with your investment process, we can work with any custom set of securities or asset classes, as long as they get frequent-enough, marked-to-market pricing. Please just drop us a message if you would like to know more about our services.