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Tail Protection for Long Investors: Trend Convexity at Work

26 Pages Posted: 9 May 2016 Last revised: 7 Jul 2016

Tung-Lam Dao

Capital Fund Management

Trung-Tu Nguyen

Capital Fund Management

Cyril Deremble

Capital Fund Management

Yves Lemperiere

Capital Fund Management

Jean-Philippe Bouchaud

Capital Fund Management

Marc Potters

Capital Fund Management

Date Written: May 9, 2016

Abstract

The performance of trend following strategies can be ascribed to the difference between long-term and short-term realized variance. We revisit this general result and show that it holds for various definitions of trend strategies. This explains the positive convexity of the aggregate performance of Commodity Trading Advisors (CTAs) which -- when adequately measured -- turns out to be much stronger than anticipated. We also highlight interesting connections with so-called Risk Parity portfolios. Finally, we propose a new portfolio of strangle options that provides a pure exposure to the long-term variance of the underlying, offering yet another viewpoint on the link between trend and volatility.

Keywords: Trend Following, Convexity, Volatility, Option Hedging, Variance Swap, CTA, Risk Parity, Tail Risk, Protection

Suggested Citation

Dao, Tung-Lam and Nguyen, Trung-Tu and Deremble, Cyril and Lemperiere, Yves and Bouchaud , Jean-Philippe and Potters, Marc, Tail Protection for Long Investors: Trend Convexity at Work (May 9, 2016). Available at SSRN: https://ssrn.com/abstract=2777657

Tung-Lam Dao

Capital Fund Management ( email )

23 rue de l'Universite
Paris, 75007
France
01 49 49 59 49 (Phone)
01 47 70 17 40 (Fax)

Trung-Tu Nguyen

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Cyril Deremble

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Yves Lemperiere

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Jean-Philippe Bouchaud (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

Marc Potters

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 10 (Phone)
+33 1 47 70 17 40 (Fax)

HOME PAGE: http://www.cfm.fr

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