14 th EDITION Trend-Following CTAs vs Alternative Risk Premia (ARP): Crisis beta vs risk-premia alpha Artur Sepp Quantica Capital AG
Content 14 th EDITION • 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
1.Trend-following captures sustained down 14 th trends in equity markets at later stages EDITION 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 20% Equity Exposure of TF Strategy Parabolic trend-line of TF returns 10% 10% 1% 1% 0% First month Second month Third month -10% -12% -20% -23% -30% -40% -50% -47% Sep-08 Nov-08 Oct-08
2. The SG Trend Index delivered 14 th protection during last equity crises EDITION
3.SG Trend Index has negative 14 th equity beta in bear regime EDITION vs ARP Index with leveraged beta Scatter plot of Quarterly returns of SG Trend & HFR ARP Index conditional on regimes of S&P 500 Index, 2000-2018 60% SG Trend Index, Actual SG Trend Index Prediction ARP Index, Actual ARP Index Prediction Bull Regime Bear Regime Normal Regime 30% Y= Return on SG Trend and ARP Index 0% -30% X= Return on the S&P 500 -60% -30% -20% -10% 0% 10% 20% 30%
4. Crisis alpha: SG Trend index 14 th delivers positive average returns EDITION during bear regimes Regime-conditional attribution of average annualized returns, 2000-2018 S&P 500 Total Return Index SG Trend Index HFR ARP Index Bear Normal Bull Cash 1% 2% 11% 8% 2% 2% 7% 6% 4% -2% -8% -12%
5.Risk-premia alpha is compensation for 14 th taking leveraged betas in bear regimes EDITION
6. • Most hedge funds are risk-premia 14 th compensations, better than ARP EDITION • CTAs anomaly: active defensive strategies Risk-premia alpha vs marginal bear betas for hedge fund, APR, and CTA indices, 1998-2018 HedgeFunds ARP indices CTAs 2.0% Linear (HedgeFunds) Linear (ARP indices) Linear (CTAs) 1.0% 0.0% -1.0% -2.0% X=Marginal beta in bear regime -3.0% -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0
7. Clustering skew of trend-following: 14 th more gains in bear vs bull regimes EDITION 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 S&P 500 12% • Long Bonds • Short Bonds • Short Commodities • Long Commodities • Long US Dollar • Short US Dollar 8% 8% 7% Average quarterly return 4% 4% 4% 0% 0% 0% Number of asset classes in corresponding bear or bull regimes -4% 3 and 4 2 1
Summary. Trend-following CTAs 14 th are not ARP strategies EDITION • Risk-premia alpha measures the regime-adjusted performance (robust with respect to the definition of 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
Disclaimers 14 th EDITION 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 or 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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