Measuring Process Diversification in Trend Following
In this research commentary we seek to measure the potential diversification benefits of introducing new ways of measuring trends.
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The New Glide Path
Investors have traditionally utilized a stock/bond glide path in order to control for sequence risk. Where does trend following fit in?
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Dollar-Cost Averaging: Improved by Trend?
Many investors often ask whether they are better off dollar-cost averaging or lump-sum investing; we find that trend following may be a happy medium.
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How to Benchmark Trend-Following
Benchmarking a trend-following strategy is difficult. The tendency is to compare it to an equity strategy, but this often leads to disappointment. We explore a better benchmark that allows investors to accurately measure performance and set expectations.
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Leverage and Trend Following
We typically explore trend following as a risk management technique for investors sensitive to sequence risk, but it may also be a way to allow growth investors to benefit from leverage by reducing the risk of permanent portfolio impairment that would otherwise occur due to large drawdowns.
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The Importance of Diversification in Trend Following
Single-asset trend following strategies can play a meaningful role in investor portfolios, but success requires introducing sources of diversification within the strategy. We believe the increased internal diversification allows not only for a higher probability of success.
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Risk Ignition with Trend Following
Trend following strategies may represent a beneficial diversifier for conservative portfolios going forward, potentially allowing investors to more fully participate with equity market growth without necessarily fully exposing themselves to equity market risk.
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Failing Slow, Failing Fast, and Failing Very Fast
Failure to meet your financial objectives can take one of two forms: fast failure and slow failure. Failing fast involves suffering large losses at the wrong time as the result of taking too much risk. Failing slow involves achieving insufficient growth due to taking too little risk.
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Diversifying the What, How, and When of Trend Following
Naïve and simple long/flat trend following approaches have demonstrated considerable consistency and success in U.S. equities. We explore how investors can think about introducing greater diversification across the three axes of what, how, and when in effort to build a more robust tactical solution.
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Protect & Participate: Managing Drawdowns with Trend Following
For investors looking to diversify how they manage risk, we believe the trend following represents a high transparent, and historically effective, alternative.
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Thinking in Long/Short Portfolios
While few investors explicitly hold long/short portfolios, every active portfolio can be thought of as the benchmark plus a long/short representing the active bets. We use this framework to distinguish the quantity versus quality of active exposures.
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RIP XIV
From inception through 12/31/2017, XIV earned over 40% annualized per year since inception. It then lost over 90% of its value in two days. Was XIV an example of Taleb's Turkey or is there a deeper lesson to be learned?
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Quantifying Timing Luck
Timing luck is the difference in performance of two identically managed portfolios, rebalanced on different days. We derive a model for quantifying timing luck and present a solution for controlling it.
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Factor Investing & The Bets You Didn’t Mean to Make
Factor-based investment strategies seek to manage risk with diversification; completely unconstrained, however, they can be overwhelmed by unintended bets.
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A Null Hypothesis for the New Year
As investors prepare their portfolios for 2018, we should consider accepting that our evidence may be nothing but a fortunate permutation of randomness.
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Portable Beta: Making the Most of the Returns You’re Already Getting
We introduce the idea of "portable beta": synthetic, additional exposure to asset classes achieved through efficient derivative exposure.
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Sleuthing Out Allocations
Backing out allocations of an investment strategy can be hard but assuming an average value can be riskier. Simplicity must be balanced with applicability.
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Tactical, But When?
We believe that investors should most actively seek to manage risk when they are most susceptible to sequence risk, i.e. the years around retirement.
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Addressing Low Return Forecasts in Retirement with Tactical Allocation
Low return forecasts make risk management crucial. Tactical strategies have been effective in the past, and moderate allocations can make a big difference.
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Accounting for Autocorrelation in Assessing Drawdown Risk
Volatility can predict drawdowns, but incorporating autocorrelation yields more accurate predictions in equities, low vol, income, and managed futures.
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