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Nigol Koulajian Opalesque Geneva: According to an innovative CTA manager, investors are missing the true risks in markets.
Nigol Koulajian's program's goal is to provide hedging as well as returns on a carry basis. He has achieved that for more than two decades by looking at volatility more deeply. The real risk in the market, he explains in an interview on Opalesque's Virtual Manager Visit (Dec.2021), is not in the volatility but in the vol of vol (volatility of volatility).
"Effectively the vol is very low when the market is going up and then it increases dramatically on the way down," he says. "So what investors are getting paid for is the instability in the volatility rather than the vol. They're getting paid a lot for what seems to be very low volatility but in reality, they're getting paid for the risk of the vol increasing on them. So you see 8% vol on the S&P when it's going up, and then 40-50% when the S&P is going down. The instability in volatility, similarly, the instability in correlation, is what investors are actually getting paid for. We call in convexity or the fact that risk metrics are not stable over returns."
Investors are missing the true risks in markets
The risk that investors are taking in terms of peak-to-trough losses is predicted by skew, that is, the change in volatility, he explains. As investors are making money on the way up in markets, they are attracted to high Sharpe ratios. They allocate to strategies that are easy to invest in and easy to explain - and those are typically the high Sharpe ratio strategies.
"Unfortunately those are the ones that are most prone to surprises when the market starts to go down," he continues. "Therefore, these are the strategies where the returns turn negative when the market starts to go down substantially with the tail events. These are the strategies where the vol is expanding when you're losing money; where the correlation to the S&P is increasing when the S&P is going down as well. All these shifts in market beta, vol, or correlation are predictable based on skew."
Quest Partners
Nigol Koulajian is the founder and CIO of Quest Partners LLC, which he founded in 2001 to pursue the development of specialised quantitative investment strategies with a focus on convexity. He started his career at Anderson Consulting, then moved to Deutsche Bank, Carmel Capital and finally Weston Capital Management, where he was director of asset allocation and product development. He was the co-founder of Avalon Asset Management, an umbrella for several funds and Enterprise Asset Management, a CTA, between 1998 and 2001. Quest is a research-driven alternative investment firm headquartered in New York and registered with the CFTC as a CTA and CPO.
According to Octa Finance, the firm has a robust track record for its unique trading approach and is known for its systematic quantitative trading process across multiple asset classes in over 50 liquid markets all over the world. The firm's AlphaQuest Original program is 100% systematic.
The same strategy has been run for more than two decades and has achieved double-digit annual returns since inception while being negatively correlated to traditional investment strategies.
Quest currently manages approximately $2bn on behalf of some of the world's leading institutional investors.
As of the end of February, the Barclay CTA index was up 1.6% YTD; the SG CTA index up 11%; and the Eurekahedge CTA/Managed Futures Hedge Fund Index up 2.4%. The HFRX Macro Systematic/CTA Index posted a gain of 1.54% in February (1% YTD) as the US Dollar remained little changed, the Russian Ruble plunged more than one-third in value, and commodities surged. Oil, aluminum, and silver led commodity gains; agricultural commodity gains were led by lumber and wheat. The index gained 4.4% in the first 10 days of March.
You can watch the whole interview here, and hear Nigol Koulajian and Brian Brugman, director of research, speak about:
The effect of behavioural biases and how Quest uses crowding in markets to its advantage
Quest's 30 different measures of volatility and how they help identify the true risks in markets
How two decades of meditation have provided Nigol with a clear edge in navigating markets
Why some of the world's leading institutional investors allocate to Quest
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