Trying to time the markets is difficult. We don't know where markets will go over the next 3 months or 10 years. Instead, we should focus on alpha - taking advantage of inefficiencies in various pockets of the traded financial markets. If markets crash, alpha strategies continue to generate returns. They may even generate better returns because the volatility that comes with market crashes creates more market inefficiencies. Agree? P.S. Join over 3k hedge fund professionals who read my newsletter every week. https://lnkd.in/gHC5ASV4
The only sustainable source of investment returns is risk premiums. Different types of risks require different strategies to harvest that premium. Essentially, that is all beta, not alpha. To harvest a risk premium we should focus on the specific risk, which means focus on beta instead of focus on alpha. A market crash is a manifestation of risk. Short term it might cause losses. Long term it’s the ultimate source of return. Like a thunderstorm on a grainfield. Investing is all about risk. Deal with it or it might deal with you.
Scott Treloar It really depends on the strategy: many quant pure alpha/arbitrage strategies are short volatility and can suffer as well in periods of crises. One needs long volatility and positively strategies, trend following based for instance, to generate alpha being opportunistically short beta if we define a market crash by Equity market crash.
No, I don’t agree. A 50% market decline is going to take any and all “alpha “ strategies down. How will your or anyone’s alpha strategies protect clients against severe Black Swans?
Scott Treloar Volatility presents opportunity in both directions. Especially since the new volatility regime started in 2018. Last year saw multiple opportunities to generate short side and long side alpha, i.e. the March 2023 SVB collapse and bailout. April 2024 is another recent example where active risk management provided an opportunity to generate short side alpha. Even during the longest strongest bull market in history, which included the lowest levels of volatility in history, there were over 3 years worth of down months. Volatility or no volatility, actively managing risk every day, and in both directions, matters. Thank you for posting. It's an important topic.
Repeatable risk adjusted absolute return instead of alpha? Depends on goals but, unless one can strip the beta, alpha on a subpar benchmark allocation doesn’t seem as valuable.
Yep I agree 💯 A wise man once said to me at the very beginning of my advisory career (17) that there is no such thing as a bad stock, just bad timing. You can make money from even the worst performing stock, timing is everything. What I love most about investing and trading is the odds are always 50:50 - either you're right or you're wrong 🤷♂️. Psychology plays such an influential role in developing a strategy that suits an investor's needs - but there is always one persistent constant - no one prefers to lose money! So if I could offer everyone participation in a strategy that guarantees not to lose money, and everyone only parts with their cash if I deliver a fixed Alpha outcome, logically it should appeal to everyone. Someone recently said this is the next big thing. I think they are right. Just Saying 🤷♂️ #BUOM
US stock market is expensive but we don’t know when it will correct meaningfully Be prepared for all scenarios
Scott Treloar This is exactly why as professionals we must always look to outperform the market, sector, constituents in an up and down market. Looking beyond Alpha. Building a high quality idea, non correlated absolute return portfolio is paramount. No benchmarking and no hedging.
Chief Investment Officer at Noviscient | Financial Risk Management, Hedge Funds
3moFirst, definitions: - Alpha is the systematic exploitation of inefficiencies in a market. - Beta is being rewarded from market and factor exposures. If markets crash proper alpha strategies should not be affected (and may often be intrinsically long volatility so will benefit). Beta strategies that are long exposure will do badly. But that painful bad performance is why the investor gets paid the risk premia. If someone wants to take alpha-fees for a beta strategy (crashes when markets crash) then you are being tricked.