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Alternative Market Briefing

New research examines quantitative trend following as an equity risk hedge

Thursday, May 16, 2013

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Nigol Koulajian
Bailey McCann, Opalesque New York:

New research from Nigol Koulajian founder and CIO, and Paul Czkwianianc, Head of Research at Quest Partners, a New York-based systematic fund, looks at how quantitative trend following could be used as an equity risk hedge. In the paper, authors note that trend following, which has primarily been used and sized as a portfolio diversifier, could actually be used and sized as an equity risk hedge, and at a lower cost than some of the tail risk strategies that have become popular in the wake of 2008. The research also shows significant style drift in the BTOP50* and large trend following shops.

Historically, trend following has helped bolster portfolios during a correction in the equity market but that function has become weaker over the years, limiting the value added to a portfolio. According to the paper, trend following managers have reduced their core style exposures and increased risk-on trades, which have a greater correlation to equities. Risk-on trades include being long equity beta, long hedge fund beta, and long FX Carry. These managers have also increased the time frames of their models as well as increasing their long biased trading overall.

"The biggest CTAs have a diminished ability to hedge equities, many of them use a longer time frame which isn't as good at hedging equities," Nigel Koulajian, paper co-author, founder and CIO, Quest Partners expl......................

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