What’s Keeping Quants Up at Night

Dr. Kathryn Kaminski examines historical market crises and explains how trend following strategies can provide insights on current market conditions.

Dr. Kathryn Kaminski, Chief Research Strategist at AlphaSimplex and Portfolio Manager for the Managed Futures strategy, explains how trend following strategies can offer insights on recent market experience and what may come next.

  • History doesn’t repeat itself, but it does tend to rhyme.
  • Quants use trend following data to measure and analyze what has happened and offer insights into the future.
  • Trend following strategies that measure short-term trends (less than three months) can identify market movements more quickly but also pick up more “noise.”
  • Longer-term trend following strategies (up to one year) are less reactive but can also be less noisy.
  • Defining “crisis” as a time with steep peak-to-trough movement, Dr. Kaminski compares the COVID-19 market selloff with eight other crisis events since 1992.
  • The COVID-19 market selloff was one of the fastest periods for speed and depth of the drawdown.
  • Today, equities and currencies are back where they started, commodities are still lower, yields have converged to zero or below and inflation is a wild card.
  • The situation in 2008 was primarily a financial crisis, but the COVID crisis affects everyone. Uncertainty is very high, as measured by volatility, and the shape of the recovery is still unclear.
  • Aggressive central bank policy helped steady the equity market, but is creating trends in other areas. If the policy makers can keep the intervention going long enough, we may be OK, but right now there is divergence between the economy and the markets.
  • Today, investment strategies are more nimble, information travels more quickly, and more people pay attention to volatility – which contributes to higher volatility.
  • We consider trend following managed futures to be a complementary strategy to traditional assets. It’s a volatility reducer rather than an alpha strategy.
  • Trend following strategies can provide “crisis alpha,” but while everyone likes the alpha, nobody likes the crisis.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of any regulated financial activity. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager as of July 28, 2020. There can be no assurance that developments will transpire as may be forecasted in this material. Past performance information presented is not indicative of future performance.

Managed Futures use derivatives, primarily futures and forward contracts, which generally have implied leverage (a small amount of money used to make an investment of greater economic value). Because of this characteristic, managed futures strategies may magnify any gains or losses experienced by the markets they are exposed to. Managed futures are highly speculative and are not suitable for all investors.