The skew of an investment strategy will change with the investment time horizon that you use. An interesting research piece from the folks at Quantica, the managed futures manager discusses the poor performance for many CTA during March. No trend-following manager was immune to the market reversal risk last month, but they also reported a more interesting nugget of information for investors.
Quantica looked at the strategy skew for different time horizons from one day to 250. They found that trend-following has a strong negative skew in the short-run but then moves higher to a strong positive number which peaks at about the six-month mark.
Trend-following, the capturing of market behavior that is moving higher or lower based on price behavior, will generate positive skew in the longer-run; however, over the short run, returns will be hurt by market reversals which may create negative skew. Long-only global equities will have strong negative skew in the short-run that will also improve, but the profile will stay negative regardless of the investment horizon.
There is pain when looking at the distribution of a trend strategy over a day, week, or month, but investors will be rewarded by sticking with the investment and allowing the cumulative price trends to take their course. Holding onto winner and selling losers will create positive skew, but regardless of the risk management, the chop and short-term reversal seen with trending markets over short horizons will cause a different skew profile.
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