Advisor Tested: HiddenLevers roots out hidden connections between world events and client portfolios

Ever since there’s been a stock market, investors have tried to tie stock prices to macro trends, never more so than in the current environment when economic uncertainty and volatility are gripping the market.

Short of sticking a finger in the wind, advisors have access to few tools to do that. Lately though, affordable, web-based programs have come online, giving advisors some of the same analytic tools that hedge funds and big Wall Street shops use — at a much higher cost — to manage risk and look for new investment opportunities.

Recently, two companies have stepped into the breach. See: Macro-economic analysis comes to the everyday RIA, and is welcomed post-2008.

We took a look at one company in this new game, New York City based HiddenLevers, which early this year launched a service that tries to uncover the hidden connections between economic trends and stock prices and portfolio performance. See: How HiddenLevers is using the web to bring wirehouse-type economic analysis to RIAs.

Developed by two former Wall Streeters with experience in IT, sales and trading, HiddenLevers looks at equities, ETFs, ADR shares, mutual funds, bond funds, equity options, major currencies and soon, fixed-income instruments, and correlates their movements with 130 economic “levers” or indicators over periods of two and ten years.

It looks at the usual indicators, such as retail sales and jobless claims but also other less obvious ones, such as Internet ad growth. Users can test stocks and portfolios against scenarios, such as a “Eurozone Collapse,” “Housing Crisis,” “Commodities Spikes,” “Natural Disasters” or construct their own what-if scenarios to check for exposure to events and trends.

The tool can identify industries and stocks negatively or positively affected by different levers or find investments that do well under a given set of economic assumptions — and display it all on dynamic graphs, tables and PDF documents.

“We’re trying to educate this audience on how to talk about risk with clients,” says HiddenLevers co-founder Raj Udeshi. “It’s not about predicting the future, but about preserving wealth. We’re trying to help advisors deal with uncertainty and to do it without having to have ten analysts.”

Device agnostic

Based in the cloud, HiddenLevers recalculates correlations daily, doing six million regressions a day and testing them for statistical significance. The company has about 230 subscribers, including RIAs, hedge funds and individual users at institutions such UBS, Merrill Lynch, Wells Fargo and J.P. Morgan.

The company is also in discussions with Pershing and TD Ameritrade Institutional to integrate HiddenLevers into their platforms.

Device agnostic, the software can be accessed on an iPad, smart phone or computer. Users pay $250 per seat per month or $50 per month for a pared-down version.

Raj Udeshi: We’re trying to help
advisors deal with uncertainty and to
do it without having to have
ten analysts.

Hidden Levers is still evolving as its developers add new features and work on making the user interface more intuitive.

While it’s still early — the company launched just ten months ago — to assess its value in the investment process or its track record in correlating economic trends to asset prices, HiddenLevers has its share of devoted subscribers.

First impressions

Michael Ling, the founder of Berkeley Inc. in Boise, Idaho, a firm with about 200 clients and $150 million under management. An economist by training, Ling has been trying off and on for about 13 years to develop a system to assess how macro-economic trends impact investments and individual portfolios. He came across Hidden Levers at a conference this fall and started using it about six weeks ago.

What features of Hidden Levers have you found most useful?

I’ve been looking at it mostly for broad macro-economic changes and trends, what’s occurring in the market and what the potential outcome could be if, for example, inflation increased to 5% or 6% or if there’s a meltdown in the sovereign debt crisis in Europe. With clients’ portfolios, we take a medium-term approach, where we want to be in four or six or seven years from now, because that’s when they will be withdrawing money. This gives us a little better view of how events might affect that.

Are you using Hidden Levers to stress test client portfolios?

I’ve done a couple of one-offs. We’re going to do it in a more general way for all the major portfolios we have.

You have a background in economics and have said that you and your firm tend to approach things quantitatively. What about advisers who aren’t as well versed in economics? Can they find value in HiddenLevers?

I’m looking at it from a much bigger perspective, but the program is also designed for those who have specific questions, like what happens if the price of oil doubles or if Treasuries shoot up. The interface is fairly simple and straightforward.

How about ease of use? Does it require a lot of time to get useful information?

Well, you better know what you’re doing. If you just have general questions, but are reasonably astute about investing and what’s going on in the markets, the program is pretty good. You can ask a question without needing to know all the mundane stuff, but if you want to maximize what you get out of it, the more you know, especially about economics, the better questions you can pose.
Hidden Levers’ founders say the service is useful in fostering client relationships, especially these days, when market volatility is generating lots of anxiety for investors and advisors.

How do you use it with clients?

Clients can get narrowly focused. They may want to put 20% of their portfolio in gold. They get the idea that a silver bullet is going to fix something without understanding the impact and potential outcome. We have several clients that get on these kicks and you can then show them, [saying] 'if you do this, this will be likely result if inflation doesn’t go up or if there’s not a meltdown in Europe.’ You’re able to show them assumptions and how those will affect their investments.

Also, twice a year we make presentations to clients about things like current market conditions and tax law changes. I’m looking forward to using the program in those presentations to illustrate what is going on in the market.

What’s been the reaction of clients when you show them HiddenLevers charts?

Their reaction has been [an impressed] “Oh!” That kind of sums it up as well as you can.

Early adopter

We also spoke with Jon Green of Encompass Advisors in Brevard, S.C. Green is an attorney, a CPA, MBA and CFP. He has a solo RIA practice dealing with portfolios of $1 million to $5 million and he is a big user of technology. He’s been a subscriber to Hidden Levers since last April.

You started using HiddenLevers just a couple of months after it was launched. Are you concerned about the pitfalls of being an early adopter?

As a general rule, I don’t want the most cutting-edge product. I’m very cautious, but when you look at how the product is designed and the methodology, it makes sense to me. There’s a certain point where there’s an initial leap of faith, but I’m comfortable doing that when everything is pointing north.

How do you use HiddenLevers in your practice?

I don’t use it to trade or to make hourly decisions in the market. I use it with my clients. People are worried about the impact of macro trends on their portfolios and what to do if a certain scenario happens. I emphasize that HiddenLevers is not a crystal ball, but that it tells you the sensitivity of things: if X happens, then Y is going to really react and Z will be slightly affected. I have a lot of clients, for example, who are in all-bond portfolios and just want income. They’ll hear something about China on the news and I’ll get calls asking “How’s that going to affect my portfolio?” I say “Come in and we’ll take a look.” It really makes them feel like I know what I’m doing and that they have some kind of control over their portfolio and over their destiny.

Have you stress tested client portfolios using HiddenLevers scenarios?

Not in the sense where I’ve used HiddenLevers results to, say, buy one ETF over another ETF, but I use it to stay in or get out of asset classes or get into new types of asset classes.

Have you made decisions or taken actions you might not otherwise have taken because of HiddenLevers?

Absolutely. With the Greek crisis, I had people who wanted to get out of all bonds. But all bonds are not created equal. When we looked at the scenarios with HiddenLevers, you could see that different types of bonds reacted differently. In some cases we stayed where we were and in some cases bought more of some bonds.

You’ve used HiddenLevers, then, to strengthen relationships with existing clients. Do you use it to attract new clients?

I use HiddenLevers scenarios in presentations in community education programs and I’ve gotten a [few?] new clients. It also helps distinguish me as an RIA from the brokerage industry.*

Any suggestions for improving the product?

When you log in, I wish they would remember your password.

Judy Messina writes the Advisor Tested column for RIABiz.

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