Corrected:
These findings reflect the prevailing incompetence of too many endowment and other institutional investment committees. As they are even unable to differentiate between outright fraud and true genius of Bernie Madoff’s and Jim Simons’ services, respectively, crap abounds of course.
In comparison, high competence obviously prevails in airlines. This results in much more reliable aircraft, particularly with regard to protecting from their most relevant risk, devastating crashes.
Thus, what is the use of focussing on annualized standard deviation instead of the worst drawdowns in our industry, where devastating crashes are also our most relevant risk? This may be the root cause of the incompetence prevailing in our industry.
However, classical trend-following Managed Futures Funds (MFFs) do make a huge difference in the alts domain. With their clear understanding of what is most relevant, they focus on exploiting the most robust and strongest momentum anomaly, driving crashes.
Their applied time-series momentum strategies provide well for the desired long volatility characteristic, negative bear beta or crisis alpha, respectively, and non-correlation to equities. All this dampens the most relevant tail risk best but also the overall volatility of equity portfolios with reliable effectiveness.
But beware of Alt. Risk Premia strategies with hidden positive bear betas. They were mixed in by some less true trend-followers to improve performance in times without strong trends after GFC. They are used even more by most other alts besides, even worse, beta from “Smart” Beta, Private Equity.
The optimal combination of MFFs with indexed equity investments as the true alpha and beta return cores is easy and cost-effective to implement and to manage. But this simple approach can provide all worth-it traditional and alternative good risk and return potentials in the markets. It reliably maximizes risk-adjusted returns based on any kind of risk significantly, making low-yielding bonds redundant.
It would be interesting to know, how many endowments use this effective approach and how this is correlated to their results in comparison to the whole sample. Has this been investigated as well or is it possible with the collected data? If yes, I would do it and post the results here if you sent me the data.
The exemplary Fortress fund is based on this unique approach, using the right alts of classical MFFs. Compared to a 70/30 world stock index/US bond index allocation it generated an absolutely outperforming return of 5,71% p.a. with significantly dampened volatility of 8,36% and max. drawdown of -17,55% since 1.2008, see: https://abrahamtrading.com/performance
Actually, this superior but simple approach is already known since 1983 from the groundbreaking “Lintner Paper”. It showed the beneficial role of MFFs as a volatile asset when combined in a portfolio with another volatile but non-correlated asset, stocks. However, this unique type of alts seems to be almost unknown. Here, it was only briefly mentioned by Ian as part of the “Dragon Portfolio”. Why so?
I find this article with compelling arguments from converted critics most helpful for a good intro: https://alphaarchitect.com/2017/10/18/trend-following-a-unique-risk-pre…