True. In my post i mentioned diversifying across factors (momentum, value etc) in different asset classes, which is different than what OP wanted.
The Quest to find 15 uncorrelated asset classes
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True. In my post i mentioned diversifying across factors (momentum, value etc) in different asset classes, which is different than what OP wanted.
Two comments - herein is cognitive bias and contradiction.
In a crash no one knows who will get crushed. Smart money may hold, dumb money may flee being skitterish people.
But wheat being seperated from chaff, in general those who are savvy traders may get a haircut like Kim Yong Un, but not a crewcut like Kayne West's.
The contradiction; 'Many who have been flying high will get crushed', my thoughts are, struggling traders will probably get crushed more-so than high flyers.
My thought are your comments are wishful thinking, a little along the lines of trader's who like to short a bull market.
I'm long, and have been 100% long since 11/1/16. I also have a pretty sophisticated "curved" hedge on which I have described on related threads recently on this forum.
Given that I doubt very strongly I can call the top of this equities market (let's put it this way, it's far more difficult than most who think they can and will may think), and that diversification is, similarly, to depend on outcomes occurring in a prescribed manner.
I don't depend on luck and suggest others do not also.
Given that I doubt very strongly I can call the top of this equities market (let's put it this way, it's far more difficult than most who think they can and will may think), and that diversification is, similarly, to depend on outcomes occurring in a prescribed manner.
I don't depend on luck and suggest others do not also.
Isn't it just easier to develop a risk management strategy to limit your potential drawdowns (which is the point of diversification right?) instead of spending all that time to first find these 15 uncorrelated assets, and then having to manage them. Think how much time it would take just to stay updated on these 15 different 'markets'.
I read through the Managed futures paper last night. Interesting read! Appears to heavily market futures trading into a portfolio. Several floor traders, I know, lately have spread their wealth across multiple CTAs as a diversification tool. The key diversification strategy with CTA's on managed futures seems to be the "actively managed" part. Averaging down/up when there are changes in trends. "Crisis Alpha", I love that marketing term. I'm going to start incorporate that wording into my Family office pitch book,
(btw, the author has since moved to a vol hedge fund, i'm sure i'll be seeing vol-arb as a crisis alpha diversification paper soon)
Of some of the techniques you mentioned and my opinions on them
- Carry is highly utilized in real-estate (90 to even 120% leverage on a "safe" income generating tangible asset). In equities, this is usually the subject of wipeout horror stories. No?
- Dispersion definitely works well in "slow" correlating equities on the up-trend and some down-trends. I don't have experience in how well they do in crashes. Does a crash disperse "slowly" into a Walmart or Berkshire Hathaway (whose significant chunk of of assets in real-estate and cash, resp.)
- Beta/Variance again works well in an up market. Should the opposite be done? Would the right strategy be to maintain net shorts and hold several long puts constructs in the more high beta stocks? This way they balloon better in a downturn? Put constructs would be expensive due to high beta/vol and heavy theta decay. But small price to pay for insurance. I can now see why NFLX weekly options premiums are so high.
- Quality/Junk - is that in reference to more bond trading and maintaining a portfolio of diversified bond holdings. Curious, what's your technique? Bond etf's? Or do you buy/sell bond directly in the markets? Again asking as a retail trader.
- Value/Momentum - this is one area, I can whole-heatedly agree with you on diversification. I guess I've been unsuspectingly implementing this through my various option strategies. Short-Term Options (1-2 weeks), Medium-Term Options (1-2 months), Long-Term options (4 - 6 months) and longer-term stock holdings + LEAPS (2-3 yrs)
Yes!!!!!! Words of a man, who knows how expensive PUT insurance is. I spend 1.5 to 2% of my portfolio value on PUT insurance that is "rolled" on a bi-weekly to monthly basis. And I still feel this is not enough!
I think one quickly finds that when their portfolio size grows, how correlated (inversely correlated) risk management becomes. I guess its also the pitfall of feeling the need to deploy most of your capital into various forms of investments.
The size of your account shouldn't have an impact on having to diversify unless you mean reaching a size where your orders move the market, which won't happen to 99% of successful traders unless they are trading tiny markets.
I think size does matter in diversification. Consider the following: Once you achieve a situation that you no longer need the returns on your account to put food on the table, then diversification is irrelevant, just a personal choice. Ross Perot decided to put everything in bonds, Buffett put everything in one stock, so are Zuckerberg, Bezos.... Or as Peter Lynch used to say, diversification is di-worst-ification.
Correlation is the wrong measurement for relationships between assets, because their times series are not stationary. Cointegration is the measure to use. Two time series are said to be cointegrated if they move together over time, and the distance between them is stable. Simply, two non-stationary series are cointegrated if there is a stationary linear combination of these series.
There is an excellent thread in this forum, which is somewhat similar to CTA style trend following.
https://www.elitetrader.com/et/threads/fully-automated-futures-trading.289589/
There are several posters in that thread who implemented their own style of managed futures trading portfolio. So private traders can implement their own trend following, if they have resources and inclination to do it.
@HobbyTrading implemented in some what smallish account using ETF's and micro futures. So it can be done.
https://www.elitetrader.com/et/threads/trading-as-a-hobby.305910/page-5#post-4580159
Just to be clear, as the name implies factor investing is more of a investing strategy rather than a trading strategy.
Secondly, "Factors" are formed by long-short portfolio. So they are market neutral. Several factor ETF's marketed in the market is long only portfolio. There in lies confusion (in this forum and in general) about their heavy correlation to the market.
Carry is there in most of asset classes. Famous carry trade usually involves currencies. Those have high negative skewness and crash prone. Carry trade of treasuries has a +ve skew. When implemented across all asset classes, carry trade tends to be neutral to very small -ve skew towards high volatility. But it does have +ve expected return over long periods.
https://jacobslevycenter.wharton.upenn.edu/wp-content/uploads/2014/06/Carry.pdf
@sle would be the best person to answer this. At its core it is about selling expensive index options (straddle or strangle) and buying cheap straddle/strangle stock component of that index (not all of them, but 30 to 40% based on some screening) either dollar notional equivalent or vega notional equivalent. It would be bad in the black swan event (since you sold lot more index options compared to components), but behaves well in shallow crash or in up market.
In theory this is about leveraging low beta assets and shorting high beta assets.
http://pages.stern.nyu.edu/~lpederse/papers/BettingAgainstBeta.pdf
Compared to other factors, this factor is based only on equities. This is about buying high quality stocks and shorting low quality (junk) stocks. This intuitively make sense and behaves well during market crashes. Since during recession, investors hold onto their perceived blue chip stocks while selling low quality stocks. But during V types reversal this factor suffers because investors pile onto junk stocks.
https://www.aqr.com/library/working-papers/quality-minus-junk
Also take a look at this backtested results. It behaved very well during 1987, 2000-2002, 2008 meltdowns
There are many ETF's which offer long Equity only factors like QUAL (quality), MTUM (momentum), SPHB (high beta), ACWV(minimum variance). But it is best implemented Long-Short across all asset classes, so that it will have low correlation to long only equities. AQR has one fund called style premia fund, which is long-short across all asset classes.
https://funds.aqr.com/our-funds/alternative-investment-funds/style-premia-alternative-fund
Another asset class, I forgot to mention which is somewhat uncorrelated to most of the asset classes is reinsurance. Take a look at http://stoneridgefunds.com/
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