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Trend-Following CTAs vs Alternative Risk Premia (ARP):Crisis beta vs risk-premia alpha

Artur SeppQuantica Capital AG

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Content

• Why most quants underperformed in 2018

• How trend-following works

• Trend-following CTAs vs ARP in bear and bull markets

• Crisis alpha and risk-premia alpha

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1.Trend-following captures sustained down trends in equity markets at later stages

1%1%

10%

-12%

-23%

-47% -50%

-40%

-30%

-20%

-10%

0%

10%

20%

Sep-

08

Oct-0

8

Nov-

08

Cumulative return of the S&P 500 index and simplified trend-following strategy in Sep/Nov 2008

Cumulative Return on Equity Index Cumulative return on Trend-following strategy

Equity Exposure of TF Strategy Parabolic trend-line of TF returns

First month Second month Third month

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2. The SG Trend Index delivered protection during last equity crises

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3.SG Trend Index has negative equity beta in bear regime

vs ARP Index with leveraged beta

-60%

-30%

0%

30%

60%

-30% -20% -10% 0% 10% 20% 30%

Y= Re

turn o

n SG T

rend a

nd AR

P Ind

ex

X= Return on the S&P 500

Scatter plot of Quarterly returns of SG Trend & HFR ARP Index conditional on regimes of S&P 500 Index, 2000-2018

SG Trend Index, Actual SG Trend Index Prediction

ARP Index, Actual ARP Index Prediction

Bear Regime Bull RegimeNormal Regime

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4. Crisis alpha: SG Trend index delivers positive average returns

during bear regimes

-8%

4%

-12%

6%

-2%

7%

8%

2%

11%2%

2%

1%

S&P 500 Total Return Index SG Trend Index HFR ARP Index

Regime-conditional attribution of average annualized returns, 2000-2018

Bear Normal Bull Cash

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5.Risk-premia alpha is compensation for taking leveraged betas in bear regimes

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6. •Most hedge funds are risk-premia compensations, better than ARP

•CTAs anomaly: active defensive strategies

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0X=Marginal beta in bear regime

Risk-premia alpha vs marginal bear betas for hedge fund, APR, and CTA indices, 1998-2018

HedgeFunds ARP indices CTAs

Linear (HedgeFunds) Linear (ARP indices) Linear (CTAs)

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7. Clustering skew of trend-following: more gains in bear vs bull regimes

7%8%

0%

4% 4%

0%

-4%

0%

4%

8%

12%

3 and 4 2 1

Aver

age

quar

terly

retu

rn

Number of asset classes in corresponding bear or bull regimes

Average quarterly returns of SG Trend Index vs. number of asset classes in bear and bull regimes

SG Trend Index in bear regimes SG Trend Index in bull regimes• Short S&P 500• Long Bonds• Short Commodities• Long US Dollar

• Long S&P 500• Short Bonds• Long Commodities• Short US Dollar

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Summary. Trend-following CTAs are not ARP strategies

• Risk-premia alpha measures the regime-adjusted performance (robust with respect to the definition of bear and bull regimes):– ARPs sell downside risk to earn risk-premia alpha– CTAs actively manage exposures to benefit from

the downside with zero risk-premia alpha

• Details in our article in the Hedge Fund Journal: https://thehedgefundjournal.com/trend-following-ctas-vs-alternative-risk-premia/

• Contact: artur.sepp@quantica-capital.com

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DisclaimersThis document is provided by Quantica Capital AG. The information and opinions contained herein have been compiled or arrived at in good faith based upon information obtained from sources believed to be reliable. However, such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of entities and securities mentioned herein are not intended to be complete. This document is for information purposes only. This document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. Investments in Alternative Investment Strategies are suitable only for sophisticated investors who fully understand and are willing to assume the risks involved. Alternative Investments by their nature involve a substantial degree of risk and performance may be volatile.

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