By Yash Panjabi and Graham Robertson – Man AHL: How can we protect against sharper, faster sell-offs? Or, better yet, how can we profit from them? ‘Attack wins you games, defence wins you titles’. Those are the words of Sir Alex Ferguson, arguably British football’s most accomplished coach, whose 13 Premier League trophies were embodied by an impeccable and resolute defensive line. This defensive philosophy is equally applicable to the arena of asset management and offers a robust principle for portfolio construction. In this paper, we explore how a long/ short (L/S) quality cash equity strategy has similar defensive characteristics to trend-following, but achieves this by a differentiated yet complementary approach.
In a previous article, Trend Following: A Different Point of Skew, we observed that the ‘crisis alpha’ provided by trend-following strategies depends on the period over which we are seeking protection. When sell-offs last longer than a few months, which is the typical sensitivity of trend-followers, strategies have time to react. Over relatively short periods, say one week, trend-following does not have enough time to adapt, and the ‘crisis alpha’ property disappears. This naturally leads us to ask: how can we protect ourselves against sharper, faster sell-offs? Or, better yet, how can we profit from them?
To answer this, we turn to the insights shared by our Man Group colleagues in ‘The Best of Strategies for the Worst of Times: Can Portfolios Be Crisis Proofed?’, by exploring how a L/S quality cash equity strategy can be a diversifying complement to trend-following whilst also sharing its defensive characteristics.