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Smooth Risk

3 comments
  • QuantGarage May 28, 2015 at 7:17 am / Reply

    Hi Moritz,

    while this post reflects some of the beliefs I hold, too, a little back up with topical research/empirical data would have been nice. Still good post, though.

    Best regards,

    Raphael

  • Vikas Rao May 28, 2015 at 7:29 am / Reply

    Don’t understand the point about non-trend strategies potentially being hidden time bombs. If there’s a stop loss concept associated with a trade, then what does it matter if its trend trading or a non-trend strategy? As long as risk is controlled and its doing its job of adding alpha when trend following systems are in a drawdown, I think its a valid part of the portfolio.

    • Niels Kaastrup-Larsen May 28, 2015 at 7:49 am / Reply

      Vikas,

      Thanks so much for engaging in the debate…

      I think its a fair point you make that “as long as you have a stop-loss…”, however, if we allow ourselves to generalise a little bit, many non-trend strategies, involves convergent risk taking betting on the “return to a mean” and often requires a high degree of leverage in order to produce enough returns. What history has shown us, like in 1998 (LTCM) and 2008 (most hedge fund strategies) is that the risks were much higher than most people thought and thus you could say that these strategies had hidden risks inside them.

      Investors like to be promised 1% return each month, they don’t want to be told that you will lose 10% or even 20% in a month from time to time. But as you will no doubt remember, 2 firms that successfully raised billions of dollars on a the expectation of “1% a month” (LTCM & Bernie Madoff) ended up loosing a lot more than 10 or 20%. So the point we are trying to make is, that it is not possible to take inherently volatile markets and magically remove the volatility and just keep the upside return…at least not over the long term.

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