We believe that the larger the universe of potential investments, the greater the potential opportunity an active manager has to add value. Acadian follows more than 40,500 stocks globally in over 100 countries, across all industries and within all capitalization ranges. We believe this coverage allows us to uncover potential opportunities often overlooked by other investors.
We employ a multi-dimensional process of converting wide-ranging investment insights into return forecasts. This process includes both bottom-up and top-down views on stocks and markets which we combine to form world-relative views on all companies globally. To account for changing market environments, we dynamically weight our factors based on persistence of payoffs, market conditions and expectations for subsequent returns. Acadian's ongoing research has resulted in important refinements to many of our factors over time, added new behavioral and technical elements to our forecasts, and ultimately enabled Acadian to consider multiple aspects of security mispricing in our stock forecasts.
Acadian's process synthesizes return forecasts with risk forecasts, transaction cost estimates and portfolio constraints. This insures that we gain access to the full potential of our return framework while adapting to changes in risks, costs and liquidity in an effort to maximize the risk-adjusted returns of a portfolio.
Within market neutral implementations of long/short portfolios, the lack of a traditional equity index reframes the portfolio construction process. With the goal of neutralizing exposure to market risk, these portfolios have an absolute return focus that allows for direct exposure to our best return forecasts. Without many of the constraints of a long-only portfolio, Acadian’s portfolio managers can focus on inefficiencies that cannot be exploited to the same degree in the presence of a traditional benchmark. This allows us to focus our efforts on skillful stock selection in an effort to maximize value added in the portfolio.
The discipline and consistency of our process extends to transacting efficiently in the markets where Acadian invests on behalf of clients. We use a proprietary and non-linear transaction cost model, which helps identify and efficiently allocate liquidity in the stocks we wish to trade. Acadian's systematic trading process utilizes a network of more than 26 counterparties to allocate trades according to execution skill within a given market segment. The objective of this process is to reduce market impact, achieve high rates of execution and minimize costs.
Long/short strategies are also impacted by the unique challenges in shorting stocks in markets globally. There are many additional considerations when taking short positions in stocks offering varying levels of liquidity. Substantial practical experience is important to overcome the challenges of short selling securities in global equity markets.
Acadian incorporates risk targets, as well as other investment guidelines, into the portfolio construction process and our compliance systems before a portfolio’s initial trading. These risk targets and guidelines are then automatically referenced and applied each time the portfolio is traded. The portfolio construction process uses systematic portfolio construction tools to control overall portfolio risk, as well as individual risk factors, in an effort to create portfolios with the optimal trade-off between risk and expected return. As a final check before trading, the portfolio undergoes a detailed quality control review by members of the investment team to ensure that all client goals are met.