Trend-Following CTAs vs Alternative Risk-Premia (ARP) Products: Crisis Beta vs Risk-premia Alpha
Sepp A., and L. Dezeraud (2019), “Trend-Following CTAs vs Alternative Risk-Premia: Crisis beta vs risk-premia alpha”, The Hedge Fund Journal, Issue 138, pp. 20-31
27 Pages Posted: 8 May 2019 Last revised: 12 Jul 2019
Date Written: January 31, 2019
We introduce a regime-conditional regression model to measure the risk profile of systematic investment strategies. We apply this model to classify systematic strategies into defensive and risk-seeking strategies with either positive or negative risk-premia alpha. Using the performance of the SG Trend Index, we show that trend-following CTAs belong to an exemplary class of defensive active strategies with insignificant risk-premia alpha. We show that our model displays a strong empirical evidence for a cross-section of hedge fund and alternative risk-premia indices.
Finally, we introduce the concept of a smart diversification for traditional and alternatives portfolios and apply trend-following CTAs to illustrate this concept. We show that the diversification benefits of trend-following CTAs arise from their “crisis” beta, and not crisis “alpha”.
Keywords: Trend-Following, CTA, Tail Risk Hedging, Quantitative Investment Strategies, Alpha, Skewness, Convexity
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation