Category: Alternative Investment Strategy
Monthly Performance Does Not Follow an Expected Return Script – Improvisation in Value, Growth, and Small Cap Indices
One way to measure market uncertainty is to run a simple thought experiment. A well-behaved market should match performance with events in a well-defined manner. An uncertain complex market environment would behave in an ill-defined manner. Close your eyes and assume you have knowledge of the news highlights for the month of May. For example:
Political turmoil in Italy and the EU
Off-again/on-again North Korea talks
Good economic data albeit with lower momentum
EM problems in Turkey and Argentina
Trade war discussions
What Keeps Me Up at Night – “The Glaringly Evident that We Have Decided not to See”
“The hardest thing to explain is the glaringly evident which everybody has decided not to see.” Ayn Rand
You May Not Want to be Bound to an Algorithm – So Use a Dashboard as a Decision Support Tool
The benefits from using algorithms are well documented, yet they are still not used for many decision-making situations. The reasons for this lack of use are varied. It could be self-interest. It could be algorithms anxiety. It could be a lack of confidence in the modeling process. If there is a high level of uncertainty concerning the most effective model, there may be fear of being wrong.
What We Look for with Trend-Following Beta – A Simple Set of Rules
Trend-following, as applied to managed futures, has been around for decades. Yet, there is no universal agreement on what is or should be a trend-following benchmark that can serve as the strategy beta or as a trend-following strategy factor. A trend-following benchmark can be used to measure the factor-beta of any manager. I can be […]
Managed Futures is not Trend-Following but it is Close – Broadening the Product Spectrum has Added Strategy Complexity
I would not be the first person to engage in the lazy thinking that managed futures are synonymous with trend-following. For many years, there was little wrong with using both terms to mean the same thing. The majority of managed futures are still trend-following.
Factor Risk Premium Differ Across Countries – Make Sure You are Factor Diversified Globally
Equity factor risk premium ranks change through time. The best performing factor premium today may not be the best premium tomorrow even if there are long-term gains across major factors. Most investors would agree with this statement; however, the dispersion of factor performance is more complex.
How Much Machine Learning is Your Quant Using? Not Clear, if you have not Defined Terms
The current buzzword used with quant investing is “machine learning.” Many quants may like to appear more intelligent by peppering their strategy discussions with comments like, “We use machine learning to create new and enhance our existing models.” Yet many investors don’t fully appreciate that machine learning is a term that refers to a broad […]
The Tale of the Tail – Focus on the Where, Why, and What is Wrong; Use Strategy Diversification as a Solution
Along with any discussion of asset bubbles, there is a complementary discussion concerning tail risk. If there is a bubble, there is likely to be a tail in the future. Bubbles and tails are tied together, yet tail events can occur even if there is no bubble.
Time Series or Cross Sectional Momentum – Which is Better? Your Choice May Matter
The marketplace is abuzz with the value of momentum trading, but a closer inspection shows that it is packaged in two major strains, time series and cross-sectional momentum. The traditional trend-following CTA focuses on time series momentum while the most of the equity research and implementation is conducted through the cross-sectional approach. There is similarity between these approaches, but there are also enough differences so that the return profile for each will not be the same.
Diversification Beyond 60/40: A Path to Improved Portfolio Performance
“Enough with this diversification talk, I’ve got my 60/40 and I am happy!” The 60/40 stock/bond portfolio mix has become a standard reference or benchmark for many investors, yet its performance versus a truly diversified portfolio is mixed.
Back to Basics on Managed Futures with AIMA – Answering the Question for Why This Strategy Should be Held
There are many works on managed futures that explain the basics of this hedge fund strategy, but the characteristics need to be reinforced especially at current times when the strategy is underperforming other hedge fund strategies. The core reason for holding managed futures is that it provides useful diversification. This diversification is not available from other strategies and this diversification will be especially present during ‘bad times” of a equity decline. Don’t forget that those strategies that have more systematic risk will need to generate higher returns. Investors will be paid to hold them. On the flip-side, there will be a “payment” for managed futures which does well in “bad times”.
US Army Risk Management – A Process for Dealing with Uncertainty
We have already focused on the US Marine Corps approach to risk management (see “Risk Management the US Marine Corps – it is a process”). Still, they are not alone within the military with formalizing approaches to decision-making under uncertainty. The US Army addresses the issue with a variation on the problem in its risk […]
Is it Worth Trading Both Euro STOXX 50 and 600? Country and Capitalization Plays
Is it worth trading two highly correlated equity indices? The correlation between the Euro STOXX 50 and 600 is generally above .95, so most would argue that the two are interchangeable. There is a significant difference in the volume of each futures contract, so liquidity may not be the same. Hence, some would argue that it is reasonable to choose one, but a closer look will show that there are spread opportunities across the two indices no different than the equity spread opportunities in the US based on size or industry mix. Spread trades in index futures offer a way to increase the opportunity set of returns in ways that are often uncorrelated with traditional directional bets.