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Alternative Market Briefing

Paper: The real market skill for many hedge funds may be with their timing of volatility and not returns

Monday, February 20, 2017

Matthias Knab, Opalesque:

Mark Rzepczynski, AMPHI Research and Trading, writes on Harvest Exchange:

For many investment strategies, the difference between a good and a bad manager is based on their ability to manage risk. It is as much about how volatility is handled as return generation. A good strategy which does not manage risk well will never be truly successful.

A key conclusion from a recent paper that focuses on volatility and factor management show that controlling volatility provides significant enhancement for many factor-based strategies. If you control volatility, you will get a positive bump in the return to risk ratio.

This is at odds with the convention wisdom of some in finance who believe you have to be in the market during risky periods like a recession to gain extra return.

You get paid to take risk during periods like a recession. This new research says that it does not matter when you invest in the business cycle. Managing risk will improve performance and that means cutting exposure when volatility is high. Timing market volatility will help with any investment strategy because volatility is generally independent of return. Put differently, if you control the risk, you will be better off versus a simple buy and hold for a given factor exposure.

This is all explained clearly in the paper "Volatility Manag......................

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