Strategic Risk Management: Out-of-Sample Evidence from the COVID-19 Equity Selloff

Abstract

Over the 2016-2019 period, we released a series of research papers on the topic of “strategic risk management”, or the embedding of risk management into investment strategy design. We show that key risk controls that we introduced materially helped during the sharp equity market selloff in February-March 2020, when the COVID-19 pandemic accelerated. First, faster trend following and long-short profitability stock strategies performed well during the equity market selloff. Second, responsive volatility targeting reduced positions dramatically ahead of the most volatile period in March 2020, and so improved both the return and risk profile at that time. Third, strategic rebalancing rules helpfully called for keeping an underweight in equities (not rebalancing back to target) at the end of February 2020, regardless of using 1-, 3-, or 12-month trend systems to base the rebalancing rule on.

Keywords: Systemic risk, COVID-19, Pandemic, Drawdowns, Rebalancing, Tail risk, Hedging, Risk management, Volatility targeting, Trend following, Moving-average crossover

JEL Classification: G11, G23, G01, C58