Flying Blind: Why a Market Risk Sensor Became Uncalibrated

Flying Blind: Why a Market Risk Sensor Became Uncalibrated

Written by Roland Smart

Posted On: February 7, 2026

I recently sat down with Anureet Saxena (CEO of Alignment Trio Management) to unpack a startling discovery from his latest research paper, co-authored with Omega Point CEO Omer Cedar: “Factor Misdemeanor: Profit Growth Unhinged!”.

If you are a Portfolio Manager, you’re likely experiencing the recent "choppy" market. But our research reveals that January 2026 wasn't just choppy—it was historically broken. We witnessed a calibration failure in the Profit Growth factor so significant that it has only been seen five other times in the last 40 years.

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Below is the full video of our conversation where we explore the nuances of this "Factor Misdemeanor" before diving into our high-level breakdown of the findings.

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A Historic Calibration Failure

To understand the magnitude of this event, Anureet uses a medical analogy: Factors are the "blood report" of your portfolio. When they behave abnormally, it’s a sign of a deep-seated systemic issue.

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In January, the F-Stat—a measure of model error—for the Profit Growth factor spiked to levels typically reserved for "Black Swan" events. Specifically, volatility was underestimated by a massive margin.

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• Historical Comps: This level of error has only occurred during the 1987 Crash, the 2000 Dot-Com bubble, the 2008 GFC, the 2016 Energy Crisis, and the 2020 Pandemic.
• The Danger: For teams that don't recalibrate, this shows up as "unexplained" drawdowns and compromised hedges. Your model says you are safe, but your P&L tells a different story.

The Discovery: Profit Growth Hijacked by Housing

How does a major factor like Profit Growth simply become "unhinged"? The answer lies in what quants call Specification Error.

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Our research found that Profit Growth and Exchange Rate Sensitivity (the "Dollar trade") reached a correlation high not seen since 1985. This shouldn't happen under normal circumstances. We discovered that a common, missing link was driving both: The US Housing Theme.

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• The Contamination: Because commercial risk models often omit short-term themes like Housing, the Profit Growth factor is "contaminated" by these thematic returns.
• The Missing Link: When we "regressed out" the influence of nine key themes (including Housing), the Profit Growth factor suddenly began behaving normally again. This proves that the volatility wasn't random—it was a signal the models weren't built to see.

PM Workflow: Turning Insight into Action

You don't need a Ph.D. to protect your book, but you do need to change your cadence.

• Check the "Blood Report" Daily: In a regime this volatile, checking risk quarterly or monthly is insufficient. You need to monitor factor characteristics on a daily basis to see if your "risk sensors" are still calibrated.
• Identify the Blind Spot: If your investment process relies on Profit Growth, you must understand your exposure to the US Housing theme. You might think you are making a bet on company fundamentals, but you are actually making a bet on a transient macro theme.
• Augmented Risk Models: The solution is to layer these "thematic betas" over your traditional model. This explains the "noise" and allows you to manage risk proactively rather than reacting to a blow-up.

Proactive Outlook: Is it Spreading?

The "unhinging" isn't limited to Profit Growth. We are already seeing similar signs of stress in the Liquidity factor.

While traditional style factors like Value and Momentum remained largely "well-behaved" through January, the underlying specification error in commercial models poses a persistent threat. Incorporating thematic analysis is no longer a peripheral luxury—it is a cardinal requirement for survival in the 2026 macro-economic climate.

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^Disclosure:

^{‍The information contained herein has been prepared solely for informational and educational purposes and reflects the views of the speakers as of the date of publication. It is based exclusively on publicly available information believed to be reliable; however, neither Alignment Trio Management nor its representatives, including Anureet Saxena, or Omega Point or its representatives, including Roland Smart, have independently verified the information or undertaken any duty of due diligence. This content does not constitute investment advice, an offer to sell, or a solicitation of an offer to buy any security, nor should it be relied upon in connection with any investment decision. Any examples or discussions of securities or markets are purely illustrative and are not intended as recommendations. Readers are solely responsible for any trading decisions made in reliance on this material. Alignment Trio Management, Omega Point, and their respective affiliates and representatives disclaim any liability for any direct or consequential loss arising from any use of the information contained herein. Any references to third-party entities or individuals are for informational purposes only and do not imply any endorsement, association, or wrongdoing.}

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