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CIO, Global Multi-Strategy Asset Manager
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RESULT Reduced risk, clear reporting. More efficient collaboration between PMs, analysts, and quant teams.

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Global Systematic Quant Manager
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USE Simultaneously backtest multiple strategies and minimize risk imbalances.
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Product Team, Global Investment Bank
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From Our Blog

Offense or Defense? Positioning for a Possible Recovery - Part 2

Feb 10, 2019 9:00:00 AM

Today we continue our analysis of early stage market rebounds with the goal of helping uncover potential offensive and defensive sector strategies that may be useful for investors in the current market. Last week we tried to find commonalities in net momentum across sectors during recovery periods. The idea being that defensive sectors tend to underperform and more cyclical or “growthy” sectors tend to rally. We were unable to find any signficant commonalities in the 2009, 2011, and 2016 periods using momentum alone.

Today we expand our analysis to look at pure fundamental factors to better understand if we can associate each sector's contemporaneous relative increase & decrease in growth & profitability with the net momentum. As usual, we'll also share a quick rundown of factor trends we're seeing over this past week.

US Market

Despite headwinds of weakening data out of the eurozone and uncertainty around the trade dispute with China creeping back into the markets on Thursday, both the Dow and the Nasdaq barely eked out their seventh consecutive week of gains ending Friday (not pictured) of this past week.

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Offense or Defense? Positioning for a Possible Recovery

Feb 5, 2019 8:46:12 PM

Today we're kicking off a multi-week analysis of the early stages of market rebounds. One area of focus is the examination of sectors investors might want to focus on, depending on whether they're seeking to get offensive or stay defensive in the market. Thus, today we will be starting our analysis through the lens of sector performance during previous market rebounds. We'll also share a quick rundown of factor trends over the past week.

We also recently published a joint case study with Kyle Mowery at GrizzlyRock Capital on the usage of factors in GrizzlyRock's investment workflow. We encourage you to read Kyle's thoughtful view on how to integrate a quantitative process into a fundamental strategy with time horizons of 3-5 years: “

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Where's the Ceiling for volatility & Beta?

Jan 27, 2019 9:00:00 AM

Never a dull week, even with the market taking a day off on Monday. With Volatility and Market Sensitivity both at “Extremely Overbought” levels, we'll take another look at these factors in a historical context to better understand where they are in relation to the market recoveries of 2009 and 2016.

US Market

In an abbreviated week, uncertainty from the government shutdown superceded a generally good start to earnings season, then gave way to a sizable rally on Friday. The S&P 500 is essentially now back to where it closed at the end of last week. So far, companies have beaten consensus estimates at a pace similar to 3Q18. Investors were cheered by news of an interim deal to re-open the government, as well as reports from the Fed that it may end the QE unwind in the near-term (Friday's market action not captured below). 
Factor Update
Here's an update on how some key factors have changed in our normalized returnindicator over the past week:
The factor market continued its relative strength, with no factors being flagged as “Oversold” in our normalized framework, and 6 factors being flagged as “Overbought” or “Extremely Overbought” (Market Sensitivity, Volatility, Growth, Liquidity, Value, & Leverage).


Volatility fell 68bps on a cumulative basis, and has started to flatten out on a normalized basis after a few weeks of considerable strength (+2.53 standard deviations YTD).
Currently sitting at +2.69 standard deviations above the mean, we wanted to get a feel for where Volatility had topped out in previous recovery regimes.

Volatility: 03/01/09 - 06/01/09
During the major equity market rally in Spring 2009, Volatility reached a normalized apex of +1.98 standard deviations (on 4/13/09), before reverting back towards the mean.

Volatility: 01/01/16 - 06/01/16
As the market recovered in the months after "Factormageddon 2016", Volatility caught a big tailwind as investors started putting risk back on. At its peak, it reached +2.49 standard deviations above the mean on 3/22/16, and then started to cool off into the summer months.

Market Sensitivity

Beta continued to see strength on a normalized basis (+0.31 SD in the past week), and now sits just shy of a rarely seen +3 standard deviations above the mean.
Looking back historically, we can see that the factor is currently at a height somewhere in between where normalized return crested during these other periods of recovery.

Market Sensitivity: 03/01/09 - 06/01/09
In the wake of the Global Financial Crisis, Beta rallied to a peak of +2.54 standard deviations above the mean (on 4/17/09), prior to gently reverting back towards the historical trend.

Market Sensitivity: 01/01/16 - 06/01/16
In this recovery, we can see a time when normalized valuation for Beta was stretched to an extreme similar to today's. On March 22, 2016, the factor peaked at +3.16 SD before reverting back to its historical trend.


These historical charts show that normalized returns for Volatility and Market Sensitivity are at levels seldom seen, even during times of rapid market recovery. Volatility appears to be in the process of plateauing, after which it's reasonable to imagine a reversion back to trend. Market Sensitivity appears to still have some room to go, provided the analog of its 2016 performance - but we are likely to see a reversion in the near future there as well. In the meantime, Profitability has slowly continued on its upward trajectory, and it will be interesting to see how the relationship between these three factors plays out if returns for the first two factors start to go south. 

We'll continue to keep an eye on these trends as we head into another week of earnings, including some market bellwethers such as Caterpillar, Apple, and Amazon. As always, if you'd like to see how these factors look in your portfolio, or would like to better understand how you can mitigate factor exposure, please don't hesitate to reach out.


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Profitability Lags While Beta & Volatility See Continued Strength

Jan 20, 2019 9:00:00 AM

This week saw strong market performance amid a cascade of political and economic headlines. Here's an update on the factor story that we continue to find of most vital importance - the interplay between Volatility, Market Sensitivity, and Profitability as it relates to a sustained market recovery.

US Market 


Our US Market factor (99% correlated to the S&P 500) continued its upwards trajectory, +1.44% since last Friday, without even taking Friday's sizable rally into account. All told, the S&P 500 gained ~3% this week, reaching its highest level in more than a month as investors received encouraging news of a potential thaw-out in US/China trade, along with robust December manufacturing numbers from the Fed. The market simultaneously shrugged off the University of Michigan's consumer sentiment index falling 7.7% as the prolonged government shutdown continues.

Factor Update

Here's an update on how some key factors have changed in our normalized return indicator over the past week:


The “Recovery Trio”

As a reminder, since last November we've been keeping an eye on the relationship between the market and the relative performance of the “Recovery Trio” of Volatility, Market Sensitivity, and Profitability. In that article, we describe how the market recovery after the “Factormageddon” of 2016 was characterized by a sustained rally between all three of these factors. Following the collapse of Beta and Volatility (the primary arbiters of risk) in Jan 2016, they both saw a positive reversion between late Jan 2016 - March 2016. Profitability, on the other hand, enjoyed positive gains throughout that entire period.

Fast forwarding to today, we can see that as the first two factors have seen strong gains over the past few weeks, Profitability (while seeing positive performance), continues to lag behind. We'll see how each factor performed over the past week 


Last week, Volatility was the beneficiary of the biggest normalized rally among the style factors. Since then, the factor has continued to enjoy gains on both a cumulative and normalized basis. In fact, at +2.56 standard deviations above the mean, Volatility is now flagged as “Extremely Overbought.”

Volatility: 1/11/19 - 1/17/19


Volatility: 1/01/16 - 3/10/16



Market Sensitivity

This week's big winner, Market Sensitivity (Beta) was up +1.08 SD on a normalized basis. The factor now sits at +2.35 SD above the mean, also placing it firmly in “Extremely Overbought” territory. 

Market Sensitivity: 1/11/19 - 1/17/19

Market Sensitivity: 1/01/16 - 3/10/16


As the third member of the “recovery trio,” Profitability did not enjoy a tailwind of the same magnitude as Volatility and Beta. It did drift slowly upwards, but not at a rate that gives us confidence in a coordinated recovery.

Profitability: 1/11/19 - 1/17/19


Profitability: 1/01/16 - 3/10/16


Compared to the sustained strength the factor saw in 2016, the slow recovery in Profitability over the past few months highlights a continued lack of real confidence in the rally. At the same time, no other fundamental-type factors (e.g Growth and Value) are indicating any pronounced, sequential sign that investors are truly motivated to reenter the market.


While the underlying metrics of Profitability (return-on-equity, return-on-assets, cash-flow-to-assets, cash-flow-to-income, gross margin, and sales-to-assets) are backwards looking, the lack of investor interest in bidding on this pillar of quality suggests that there might be trepidation that companies won’t have the same level of quality earnings going forward.

As return for Beta and Volatility continues to reach extreme heights, and without the support of Profitability, we may expect to see a sell-off in both factors. It's especially important to keep an eye on them as we head into the bulk of 4Q earnings announcements. We've already seen a couple of warning signs between Alcoa's forecast of weakening demand in 2019 and Morgan Stanley's earnings shortfall.

We'll continue to monitor these factors as earnings start to roll in. As always, if you'd like to see what your portfolio's relationship is with any of these factors, or would like to better understand how you can mitigate factor exposure, please don't hesitate to reach out.


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Volatility & Beta Up Big While Profitability Slowly Recovers

Jan 13, 2019 9:00:00 AM

This week brought with it some mixed news, between the potential jobs impact stemming from the government shutdown, increased optimism over US-China trade, and recent comments from the Fed about the need for “patience”. With regard to factors, we're seeing signals that indicate that we're in the midst of a return to a “risk-on” environment, with Volatility and Market Sensitivity both getting bid up. At the same time, Profitability (Quality) continues to slowly recover. Let's dig in.

US Market

The US Market factor (99% correlated to the S&P 500) saw a substantial rebound, up 6.53% since last Friday. The combination of Friday's strong jobs print, trade optimism, and a positive forecast out of GM had investors buying up stocks after the recent bout of pain in the market.


Factor Update

Here's an update on how some key factors have changed in our normalized return indicator over the past week.

In our Nov 4 Factor Spotlight - Short Squeeze or Sustainable Rebound?, we discussed the relationship between the market and the Profitability, Volatility, and Market Sensitivity factors. We posited that based on the historical interplay between the factors, we would want to see a rally in all three factors before crowning any factor rally a true rebound versus short covering. As you can see, Market Sensitivity and Volatility both saw a substantial rally over the past few days. Profitability saw a recovery, but at a much slower clip.


This factor was the highest performing factor over the past week, up 1.15% and a whopping +1.44 standard deviations on a normalized basis since Jan 4. A rally of that magnitude in Volatility serves as a strong signal that investors have been eager to add more risk to their portfolios. 
Market Sensitivity

Similar to Volatility, Beta enjoyed a major recovery - up 2.47% in absolute terms and +1.13 standard deviations on a normalized basis. This suggests that investors were happy to put money into names that move in step with the market, another indication that many were looking at recent market turmoil in their rearview mirror.

Lastly, we saw positive movement for Profitability (one of the pillars of “Quality), but not to the same extent as the other two factors that we've tracked here.
In the above-mentioned article, we explored how historical recoveries were punctuated by huge rallies in all three of these factors. Profitability has drifted upwards, but nowhere close to the “vertical line” that we've seen in Volatility and Market Sensitivity. As a result, we can say that we may be in early innings of a true market rally, but we'd like to see real money come back into Profitability before we're able to make that claim. We may be heading in that direction, and will keep you apprised on these factors as the story develops.

As always, if you'd like to see what your portfolio's relationship is with any of these factors, or would like to better understand how you can mitigate factor exposure, please don't hesitate to reach out.

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