In an extremely volatile year, initially triggered by the Global COVID-19 Crisis (GCC) and then amplified by the resulting economic recession and financial distress, our tail risk hedging strategy – the SHIELD investable strategy delivered a return of 11.6% YTD, versus the disastrous performance (-25%) of the S&P 500. More importantly, the SHIELD achieved its exceptional return with an annualized volatility of merely 7%, versus 52% for the S&P 500. The maximum drawdown of our SHIELD this year was only -1.1%, compared to -29.5% suffered by the broad market.
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The Federal Reserve is “all in” with QE infinity, while the White House and the Congress are working on a >$2 trillion fiscal stimulus package. Countries around the world are rushing to implement social distancing and introducing monetary and fiscal policy stimulus.
While the COVID-19 has appeared to be contained in Asia, the number of infected cases and fatalities continue to explode in the rest of the world. Even Asia is facing the risk of a second wave outbreak. Draconian social distancing and lockdowns are bringing the world to a standstill. Market volatilities have spiked to record highs and investor sentiment plunges to all-time lows.
The Wolfe QES Covid-19 Tracker Dashboard provides a trend/reversal analysis of historical equity style pattern. The returns are computed using style value weighted long/short portfolio and we use moving average to estimate the deviation.
The Global COVID-19 Crisis (GCC) has caused massive volatilities across asset classes. In the equity world, we have seen enormous dislocations for many factors (e.g., hedge fund crowding, leverage, credit exposure, and interest rate sensitivity) across almost all sectors. In this report, we introduce our “Factor Distortion Toolkit” that managers can use to measure the extent of factor dislocation, potential duration of such stretching, and the risk/return trade-offs in the near future.
As detailed in Quantifying the Fear of A Global Pandemic, the number of infected cases continues to snowball in Europe and North America. As draconian social distancing measures are implemented in more and more countries and regions, the direct and indirect economic impact is expected to be enormous (see Embracing a World of Zero Yields). The financial market, given its forward-looking nature, has reacted considerably with almost all asset classes are down, which further triggered a full-blown hedge fund deleveraging (see From Global Pandemic to Hedge Fund De-Leveraging Armageddon).
In this research, we use three factors to measure hedge fund de-leveraging – hedge fund crowding (based on the long-side ownership data), short interest (using a real-time securities lending database), and quant positioning (proxied by our flagship stock-selection model). All three factors experienced massive moves starting Friday with broader hedge fund de-leveraging accelerating into Tuesday. This is consistent with anecdotal accounts of forced liquidations due to VAR limits, spikes in the cost of leverage from prime brokers, and hedge fund redemptions.
The QES Equity Factor Style Distortion Analysis Dashboard provides a trend/reversal analysis of historical equity style pattern. The returns are computed using style value weighted long/short portfolio and we use moving average to estimate the deviation.
The Federal Reserve made another surprising move on Sunday, slashing the Fed Funds Rate to close to zero and essentially launching QE4, amid further deterioration of the Global COVID-19 Crisis (GCC). Other major central banks made similar moves in recent days to lessen financial distress. The zero Fed Funds Rate leaves little additional room for monetary policy easing. Global equities and commodities continue their historic slide.
In this month’s Portfolio Compass, we extend the puzzling low risk anomaly in a few directions. One of the central tenets in finance is that investors should be compensated with higher returns by taking on more risk. However, empirical results mostly suggest the contrary – stocks with lower risk (beta or volatility) often earn higher returns.
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