“Dr. Mo”
Discretionary Risk
Management Overlay

Dr. Mo helps clients overcome two of the most challenging behavioral heuristics that prevent investors from achieving their strategic investment objectives – the Action Bias, which describes our tendency to favor action over inaction, and the Illusion of Validity, which describes our tendency to be overconfident in the accuracy of our predictions.

At all times, investors are likely to experience the best performance by positioning their portfolios – or at least any incremental bets – in alignment with the Top-Down Market Regime. Responding to phase transitions in the Top-Down Market Regime early and with conviction is the key to remaining on the right side of market risk, which is shorthand for maximizing upside capture in bull markets and minimizing downside capture in bear markets.

We feature a collection of high-quality quantitative and qualitative signals throughout our macro risk management process to help clients build or erode conviction in the sustainability of the current Market Regime and develop conviction in what the next Market Regime is likely to be. Understanding the likely sequence and timing of Market Regime phase transitions ex ante is helpful to clients that prefer low portfolio turnover so they can anticipate how Dr. Mo’s Proper Trade recommendations are likely to evolve and allocate assets appropriately.

Understanding the likely sequence and timing of Market Regime phase transitions ex ante is not necessary, however. The 42 Macro Global Macro Risk Matrix Backtests prove just how effective it is to dispassionately respect the evolution of the Market Regime irrespective of one’s fundamental views. Said simply, the 42 Macro Discretionary Risk Management Overlay aka “Dr. Mo” proves investors do not have to predict the future to make and save lots of money in financial markets.

Investors should first determine what a maximum and half position size corresponds to in their portfolio.

Then investors should allocate assets according to Dr. Mo’s Proper Trade recommendations, only changing positions when the corresponding Proper Trade recommendation changes.

Investors that require support determining which assets to focus on with their available capital should consult the “Key Portfolio Construction Considerations” at the bottom of the Dr. Mo slide.

Investors may also use the Market Regime and Volatility-Adjusted Momentum Signal (VAMS) data featured in Dr. Mo to implement a customized version of the 42 Macro KISS Portfolio Construction Process. Consult our KISS FAQ for more details.

If an ETF is bullish (or bearish) from the perspective of the 42 Macro Volatility-Adjusted Momentum Signal (VAMS) and that is in line with how the underlying asset should trade in the current Top-Down Market Regime, then Dr. Mo will prescribe a “LONG (or SHORT): Max Position” Proper Trade recommendation.

If an ETF is neutral VAMS and the underlying asset should be bullish (or bearish) in the current Market Regime, then Dr. Mo will prescribe a “LONG (or SHORT): Half Position” Proper Trade recommendation.

The 42 Macro Discretionary Risk Management Overlay aka “Dr. Mo” is optimized for the needs of professional investors – which have a dual focus on relative and absolute returns – and sophisticated retail traders operating hedged portfolios.