Hedge Fund Financial Model

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Appian Analytics has worked with a number of hedge funds and other investment companies to help them automate the processes surrounding analyzing, monitoring, and managing investments. Recently, Appian Analytics completed a fully customized Excel spreadsheet for a hedge fund that needed a custom portfolio optimization model.

The Excel spreadsheet model analytics are based on William F. Sharpe portfolio management theories and leveraged the Sharpe ratio to optimize expected return while minimizing risk.

Often times, hedge funds and other investment management companies require customized Excel spreadsheets and models in order to facilitate their unique investment analysis requirements. Indeed, most hedge funds have highly unique approaches to investment management which require special analysis, monitoring, and management tools. These tools can be non-existent in the off-the-shelf software market place. As a result, special, custom designed software tools are important for the hedge fund to properly facilitate the unique investment approach, strategy, and analytics.

Appian Analytics provides a range of specialized analytics and research automation services to benefit hedge funds and other investment companies. In this case, the design of a specialized Sharpe Optimization model was important to the hedge fund in order to ensure optimal return with minimal risk given historical returns and variability in the underlying equity/stock based portfolio. In addition, to the standard features of a Sharpe return and risk optimizer, the hedge fund required a number of important functions.

The following are the features and functions of the custom Sharpe-based portfolio optimization model:

  • Automated Historical Stock Price Acquisition - The Sharpe model designed by Appian Analytics provided automatic download of historical stock price information. This automated download included the ability to use "free" services from Yahoo Finance or MSN. Additionally, the ability to also automatically integrate Bloomberg price information at a later date was addressed and enabled.
  • Sector Based Management & Optimization - The hedge fund required a sector-based approach to managing, monitoring, and optimizing holdings. This sector-based approach was designed into the optimization model to allow for optimization of individual sector holdings and accommodated up to 20 different sectors. As an example, each sector might be divided up into "Energy", "Technology", "Healthcare", etc. Functionality was provided to optimize each sector in isolation as well as all sectors optimized in total.
  • Minimum and Maximum Constraints - The Sharpe optimization model was designed to allow the investment managers to override the overall optimization algorithm with minimum and maximum constraints. These constraints included minimum/maximum number of shares to hold or minimum/maximum total percent of sector value. These constraints were also available at the overall portfolio level in order to accommodate optimization of individual sectors and the minimum or maximum to invest in each.
  • Fully Automated Optimization - Using the stock prices, expected values, and any user defined constraints, the Sharpe optimization model will automatically download stock prices, calculate expected return, calculate risk as measured by the standard deviation, and calculate prospective weights to maximize potential return while minimizing risk.
  • Standard Excel Based Solution - The Sharpe model was able to be used throughout the organization by using standard Microsoft Excel functions and capabilities. The only extra feature capability required is a special add-in provided in recent version of Excel called "Solver". "Solver" provides all linear optimization functionality required to optimize potential return and minimize risk according to the constraints set by the user.

Appian Analytics can help you implement custom investment analysis, investment management, research automation, and investment monitoring tools. Your custom tools can be designed using industry standard technology such as Microsoft Office, Java, and HTML. What's more, these tools can be customized to fit your unique investment approach.

If you would like to learn more about implementing custom investment management tools that help you increase the success of your personalized strategies, Appian Analytics can build a solution for you.

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