Trend-Following CTAs vs Alternative Risk Premia (ARP): Crisis beta - - PowerPoint PPT Presentation

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Trend-Following CTAs vs Alternative Risk Premia (ARP): Crisis beta vs risk-premia alpha

Artur Sepp Quantica Capital AG

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Content

• Why most quants underperformed in 2018
• How trend-following works
• Trend-following CTAs vs ARP in bear and

bull markets

• Crisis alpha and risk-premia alpha

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1.Trend-following captures sustained down trends in equity markets at later stages

1% 1% 10%

• 12%
• 23%
• 47%
• 50%
• 40%
• 30%
• 20%
• 10%

0% 10% 20% Sep-08 Oct-08 Nov-08

Cumulative return of the S&P 500 index and simplified trend-following strategy in Sep/Nov 2008

Cumulative Return on Equity Index Cumulative return on Trend-following strategy Equity Exposure of TF Strategy Parabolic trend-line of TF returns

First month Second month Third month

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• 2. The SG Trend Index delivered

protection during last equity crises

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3.SG Trend Index has negative equity beta in bear regime vs ARP Index with leveraged beta

• 60%
• 30%

0% 30% 60%

• 30%
• 20%
• 10%

0% 10% 20% 30% Y= Return on SG Trend and ARP Index X= Return on the S&P 500

Scatter plot of Quarterly returns of SG Trend & HFR ARP Index conditional on regimes of S&P 500 Index, 2000-2018

SG Trend Index, Actual SG Trend Index Prediction ARP Index, Actual ARP Index Prediction Bear Regime Bull Regime Normal Regime

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• 4. Crisis alpha: SG Trend index

delivers positive average returns during bear regimes

• 8%

4%

• 12%

6%

• 2%

7% 8% 2% 11% 2% 2% 1%

S&P 500 Total Return Index SG Trend Index HFR ARP Index

Regime-conditional attribution of average annualized returns, 2000-2018

Bear Normal Bull Cash

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5.Risk-premia alpha is compensation for taking leveraged betas in bear regimes

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• 6. •Most hedge funds are risk-premia

compensations, better than ARP

• CTAs anomaly: active defensive strategies
• 3.0%
• 2.0%
• 1.0%

0.0% 1.0% 2.0%

• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0

X=Marginal beta in bear regime

Risk-premia alpha vs marginal bear betas for hedge fund, APR, and CTA indices, 1998-2018

HedgeFunds ARP indices CTAs Linear (HedgeFunds) Linear (ARP indices) Linear (CTAs)

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• 7. Clustering skew of trend-following:

more gains in bear vs bull regimes

7% 8% 0% 4% 4% 0%

• 4%

0% 4% 8% 12% 3 and 4 2 1 Average quarterly return Number of asset classes in corresponding bear or bull regimes

Average quarterly returns of SG Trend Index vs. number of asset classes in bear and bull regimes

SG Trend Index in bear regimes SG Trend Index in bull regimes

• Short S&P 500
• Long Bonds
• Short Commodities
• Long US Dollar
• Long S&P 500
• Short Bonds
• Long Commodities
• Short US Dollar

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• Summary. Trend-following CTAs

are not ARP strategies

• Risk-premia alpha measures the regime-adjusted

performance (robust with respect to the definition

• f bear and bull regimes):

– ARPs sell downside risk to earn risk-premia alpha – CTAs actively manage exposures to benefit from the downside with zero risk-premia alpha

• Details in our article in the Hedge Fund Journal:

https://thehedgefundjournal.com/trend-following- ctas-vs-alternative-risk-premia/

• Contact: artur.sepp@quantica-capital.com

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Disclaimers

This document is provided by Quantica Capital AG. The information and opinions contained herein have been compiled or arrived at in good faith based upon information obtained from sources believed to be reliable. However, such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of entities and securities mentioned herein are not intended to be complete. This document is for information purposes only. This document is not, and should not be construed as, an offer, or solicitation of an offer, to buy

• r sell any securities or other financial instruments. Investments in

Alternative Investment Strategies are suitable only for sophisticated investors who fully understand and are willing to assume the risks

• involved. Alternative Investments by their nature involve a substantial

degree of risk and performance may be volatile.

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