QAP Monthly Review April 2015

The month of April offered a strong counter move compared to the trends over the last several months. US equity indices reduced their return gap to European indices. The decline of the Euro and the US Dollar increase against the broad currency basket stopped. Oil saw a significant rebound to more than 60 USD. The major damage occurred in the bond markets. Using the word crash is no exaggeration when following the movements of the German Bund, for example.

We suspected that this was not the final reversal of the low interest rate environment but these few days showed what the consequences can be. The panic spreads quickly to other asset classes, and apparent liquidity vanishes. In the equity markets, this “liquidity premium” was recognized several times, e.g. during the Flash Crash. For bond market investors, the disappearance of buyers for the short and longer term could be a surprise.

Every trend comes with periods of corrections. A counter move, even if it establishes fast and with high magnitude, does not have to be the end of a trend, let alone the start of a bigger trend in the opposite direction. It is one fundamental pillar of our investment philosophy to accept counter movements as a component of a bigger trend. On purpose, we do not optimize to prevent such countertrend movements because it distracts and one could lose sight of the bigger picture. Moreover, these optimizations are often accompanied by high implementation and opportunity costs (in the CTA space often described as strategy costs). We underpinned our approach with last year’s article on why we prefer robustness over optimization.

On frequent request, we wrote a tutorial for the Portfolio Simulation Tool which you can find under Strategies. Please read or download the tutorial here.