01 Jun Learning From Quest Partners' "Quantitative Trend Following Strategies and Equity Risk"
Style drifts in some trend following funds reduced their ability to hedge equity drawdowns and reduced their positive skew.
In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.
The paper argues that in recent years, trend-following fund managers appear to have reduced their exposure to trend following, increased the time frames of their models, increased long biased trading, increased their exposure to Fixed Income trading and increased their exposure to risk-on trading.
These style drifts reduced their ability to hedge equity drawdowns and reduced their positive skew. These drifts are the result of investor demand for lower volatility, a chase of recent return drivers and an attempt by fund managers at increasing capacity.
Research Paper: Quantitative Trend Following Strategies and Equity Risk: From Diversifier to Hedge
Authors: Nigol Koulajian, Paul Czkwianianc
Company: Quest Partners