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Positive Convexity: How a CTA has outperformed the index by +7.5% annually

Apr 12 2016 3 Comments
Nigol Koulajian is the Founder and Chief Investment Officer of Quest Partners LLC, a CTA he established in New York in 2001 which currently manages approximately $630 million in assets under management. The AlphaQuest Original program (AQO) is the firm’s flagship strategy. AQO has delivered an annualized return of +13.5% over its 16 year track record, with +7.5% of annual alpha over the BTOP50 Index and +11.5% of annual alpha over the S&P 500. AQO also performed well in recent years, returning +16% in 2013 despite a low volatility environment and u ...more

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Talkback 3 Comments

Please use the comment feature below for your feedback, or email me at knab@opalesque.com. Thank you!

Matthias Knab Posted On Apr 12 2016

Thanks for the comment Steve.

Convexity and skew are not exactly the same. Convexity is any type of curvature in the return or risk profile of an investment. Skew is a type of convexity which is specifically non-symmetric so its magnitude is particularly different on the upside versus the downside.

In regards to your second question, with a little approximation, we can say that change in price is return, change in returns is variance (the square of volatility), change in volatility is skew, and change in skew is kurtosis. Both skew and kurtosis measure characteristics of convexity. All these statistics are directly measurable for a single investment asset. A portfolio can be constructed by normalizing price, returns, volatility, skew, and/or kurtosis. In today's world, it is very common that investments have very low volatility risk but simultaneously extremely high skew risk. In the framework of the academically supported, volatility normalized (for example "all-weather") portfolio, low volatility assets gain very large allocations despite their large skew risk. Therefore they become overpriced as their true risk is not being taken into account. This is the inefficiency that we try to benefit from to generate Alpha.

Thank you
Nigol

Nigol Koulajian Posted On Apr 15 2016

I enjoyed the interview very much. It seems to me based on the interview that skew and positive convexity were used interchangeably. Is this the case? Also, is convexity measurable and used in the position sizing/portfolio composition process, or is it an output, only determined when comparing the returns of the portfolio to some benchmark?

Steve Freeman Posted On Apr 14 2016

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