Finding value when the trend fades: convexity in uncertain times

key takeaways.

• Cross-asset systematic strategies behave very differently in periods of unequivocal uncertainty and periods of unequivocal risk

• Trend following strategies tend to suffer when the macro and political environment is unclear, while carry and value prove more resilient

• Our multi-asset team’s recent research efforts to improve the robustness of our systematic cross-asset overlays highlight that risk and uncertainty regimes require adaptation.

The hedging of high-risk regimes has always been paramount to portfolio construction. Although diversification – particularly for multi-asset portfolio managers – helps mitigate specific risks, directional portfolios remain exposed to sharp drawdowns in high risk environments when assets re-correlate across asset classes.

In these extreme scenarios, solutions are well known: macro-timing, trend following and long volatility exposure may act as tail hedges. Regimes of high economic uncertainty – the situation we seem to be in at present – when returns are less informative about future trends, have attracted far less attention. This excerpt from our Q2 Simply put considers how to find the right systematic strategy for such periods, using history as a guide to 2025...

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