Risk-Return Analysis of Dynamic Investment Strategies

29 Pages Posted: 14 Jul 2014

See all articles by Benjamin Bruder

Benjamin Bruder

Lyxor Asset Management

Nicolas Gaussel

Lyxor Asset Management; Université Paris I Panthéon-Sorbonne

Date Written: June 2011

Abstract

The investment management industry has developed such a wide range of trading strategies, that many investors feel lost when they have to choose the investment style that meets their requirements. Comparing these on a like-for-like basis is a difficult task about which much has been written. The scope of this paper is restricted to strategies investing in a single asset, and which are driven by the price of this asset. We show how those strategies can be fully characterised by two components: an option profile and some trading impact. The option profile depends solely on the final asset value, whereas trading impact is driven by the realised volatility. From this analysis, most of these investment strategies can be categorised in one of three families: directional, contrarian and trend-following. While directional strategies exhibit the same kind of behaviour as the underlying, contrarian and trend-following strategies exhibit asymmetric return distributions. Those asymmetric behaviours can be misleading at first sight, as a seemingly stable strategy may hide large potential losses.

JEL Classification: G11, G12, G13

Suggested Citation

Bruder, Benjamin and Gaussel, Nicolas, Risk-Return Analysis of Dynamic Investment Strategies (June 2011). Available at SSRN: https://ssrn.com/abstract=2465623 or http://dx.doi.org/10.2139/ssrn.2465623

Benjamin Bruder

Lyxor Asset Management ( email )

Paris
France

Nicolas Gaussel (Contact Author)

Lyxor Asset Management ( email )

Paris
France

Université Paris I Panthéon-Sorbonne

12 place du Panthéon
Paris, IL
France

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