Reveal the implicit macro bets you don’t have an edge in, and in turn, isolate and limit that exposure. The presumption is that a long / short pair from that same industry has removed other factor bets such as market direction, region and style. However, each stock can have quite different exposures to the overall macro environment. Indeed, these exposures can be compared to any benchmark.

Stress tests are designed to examine the potential impact of a macro scenario playing out. A very common method for designing stress scenarios is to draw from historical events. Alternatively, the user can specify the scenario. In both cases, since macro factors often move together, it is important to account for their correlations when designing realistic stress scenarios. To facilitate this, we leverage our factor covariance matrix.