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Tactical Trading Awards 2022 Q&A With AlphaBot And NilssonHedge

AlphaWeek’s Tactical Trading Awards 2022 are produced in association with AlphaBot and NilssonHedge and uses a proprietary scoring system that considers the Sharpe, Sortino, and Serenity ratios and downside capture. AlphaWeek’s Greg Winterton discussed the logic behind the awards with AlphaBot’s Dmitri Alexeev and NilssonHedge’s Linus Nilsson.

GW: Linus, Dmitri, you’ve both worked in manager selection in your careers. For AlphaWeek’s Tactical Trading awards, we’re using the underlying sector exposure as the starting point. What’s the rationale there?

DA: Identifying the exposure is important to help investors better understand the role of alternative investments in their overall portfolio. A well designed portfolio strives to achieve multiple objectives, and the pieces in it should fit to each other like those in a jigsaw puzzle. Exposure is a part of this puzzle, so understanding it helps improve overall quality of manager selection. Since our awards are designed to help the investors the most while also rewarding good performing managers, it creates a “win-win” for both types of participants.

LN:  Exposure is a useful starting point for understanding a particular manager. 

Discretionary managers tend to be focused on a subset of markets. For instance, a dedicated Energy manager typically uses different inputs than your typical Global Macro trader or systematic trend follower. Thus, sector exposure is a useful starting point for trying to sort through a large set of managers. It does not necessarily give you the full picture but offers clues to understanding how a potential manager can fit into your portfolio. 

Having access to such managers can be useful when you are looking for managers that can provide portfolio diversification within your portfolio. 

GW: The winners in each category are determined by a combination of the Sharpe, Sortino, and Serenity ratios, and downside capture. Again, what’s the logic here?

LN: We believe that those ratios offer useful sorting heuristics, a starting point for managers that deserves additional attention. Sharpe is a symmetrical ratio, where upside and downside volatility is treated in the same manner but is often the first or second performance measurement that an allocator looks at. The Sortino group penalizes downside volatility and does thus reward managers with positive skew, something that is one of the historical reasons for CTA allocations within a diversified portfolio. 

Historically, managed futures strategies in particular can be compared to a “pain arbitrage”; small losses interspersed with occasional larger gains. The Serenity ratio measures the potential pain that an allocator will experience during an allocation, by using the length and depth (adjusted for risk) of a particular manager’s drawdown. Finally, we added a measure that rewards managers for having positive returns in negative equity markets.  Those are useful characteristics for analysing past performance. Although past performance is not necessarily indicative of future results, it is good starting point for your analysis. Understanding why these managers performed the way they did, are useful inputs in the Due Diligence process.

DA: It would be challenging to add something statistically speaking to the answer above by Linus. If I may rephrase it in a more investor-friendly way, then our goal was to identify (and reward) the type of return profile that investors will appreciate, that is, focus on risk-adjusted performance with attention to downside risk, overall stability of the return stream (Serenity) and the diversification. With equity markets becoming unstable, I am certain many investors are looking for ways to diversify their portfolios, and our way of analysis can help.

GW: What are some of the things idiosyncratic to macro and managed futures hedge funds that you think are important for investors to understand?

DA: Liquidity and daily valuations/estimates are a considerable factor. Daily data is much more informative, and one month of daily returns is worth two years of traditionally monthly reporting. This is an important benefit of managed futures based strategies.

LN: It is one the few ways allocators can get access to active management of commodities, something that may be an interesting area to have exposure to. Especially so when inflation looks to be “transitory for longer”. 

GW: Finally, what would you recommend to investors and managers who want to see how their programs stack up against the competition?

LN: The client, regardless of if you are the investor or the manager will always demand that you are outperforming. Make sure you know your competition and can show that you are adding value. Having access to data and analytics is a solid first step. 

DA: Easy, take a look for yourself! The data is readily available, and so is the analysis tool. The measures we used are part of AlphaBot’s toolbox, and can be calculated for any given set of managers and strategies. This exercise can help both investors and managers to see the strong sides as well as areas of improvement of their portfolios and programs.

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