How Asset Management Software Vendors Should Adapt to Market Volatility
Using the VIX to Direct the Sales Process –Software vendors selling to the Asset Management industry clearly understand that market volatility has a negative impact on their business, but how do you quantify the impact? At our firm, Alpha Theory (www.AlphaTheory.com), we have found that there is a severe negative correlation between market volatility and every measurable attribute of our sales process. We ran basic statistical analysis comparing the VIX, which is a contract betting on the future movement of the S&P 500 and is commonly known as the fear index (http://en.wikipedia.org/wiki/VIX), against our internal barometers of sales growth (new customers, new opportunities, cold calls connected, email responses, and meetings scheduled). The analysis unearthed a negative correlation between 20 and 50% for the VIX to our various sales metrics. This means that up to 50% of our ability to create new opportunities is linked to market volatility.
To put this in perspective, the VIX historically averages below 20 and is currently in the mid-60s and hit a record high of 90 on October 24th – implying the market is anticipating a move of 90% over the over the next twelve months! This volatility expectation makes it near statistically impossible to add new opportunities and customers. In fact, in our anecdotal evidence, contacting potential customers during high VIX periods actually may cause us to lose traction in the pipeline because they perceive our contact during extreme volatility as a naive affront on their time.
Based on this analysis we are advising our sales team to stay on the sidelines for any early pipeline opportunities until the VIX falls below 50 and to proceed with caution when dealing with later stage prospects and existing clients. In fact, based on our analysis, we will not regain full pipeline momentum until the VIX drops below 25. Assuming the analysis holds true for other software vendors, sales managers should use the VIX as an indicator of receptivity for potential clients. Based on our analysis, early stage opportunities should be almost at a standstill when the VIX is above 50, expect moderate interest between 25 and 50, and a fertile selling environment with a VIX below 25. Unfortunately, our company does not have data during the uber-low VIX environment of 2004 to mid-2007 so that we could see if sales actually improve during ultra low volatility markets. We all should hope that we get that opportunity in the not too distant future.
Cameron Hight, CFA, is an investment industry veteran with experience from both buy and sell-side firms, including CIBC, DLJ, Lehman Brothers and Afton Capital. He is currently the Founder and President of Alpha Theory™, a Portfolio Management Platform designed to give fundamental money managers the ability to create their own repeatable discipline to organize the complex process of portfolio management. For more information on Alpha Theory™ visit www.AlphaTheory.com.
