A Low Drawdown of any other Duration would be as Sweet

To showcase the resilience of Alphalytics Quant Multi-Strategy (AQM), I share with listeners that the strategy had a 5.6 percent drawdown* in 2020 (Feb only); relative to the S&P 500 drawdown of 20 percent (Jan, Feb, and Mar 2020). (*Maximum monthly cumulative.)

Most of the time this is enough of a home run: An earnest signal that AQM has what it takes to withstand a real-world stress test.

I was taken aback when a listener recently suggested that the 2020 Covid market crash was a short-lived bear market – the implication is that 2020 was not entirely a market correction and therefore not a worthy stress test for AQM.

I beg to differ.

But therein lies the challenge: My experience with individual investors is that I only have 8 seconds to make my case.

Any longer, eyes begin to glaze over and hearts harden, especially if I were to delve into a lengthy technical explanation of risk-adjusted return, reward-to-risk ratio, Sharpe Ratio, and the merits of non-discretionary, systematic investing.

The burden of proof is on me to offer a non-threatening wedge of an initial response; one that creates space for follow-on dialogue.

Ideally, I’d offer sound technical explanations in digestible soundbites that resonate with the listener’s worldview.

(The good news is that, over the past year, I have honed my responses to numerous other inquiries and challenges to AQM – thanks to listeners who gave generously of their time and were willing to step out of their comfort zones to question AQM.)

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That the 2020 correction was a short-lived bear market, my listener was implying: When AQM outperforms despite a prolonged recession, only then will it be deemed a worthy fund. (Some investors just got to throw down the gauntlet with a scorched-earth scenario.)

After some thought, my clunky response is four-fold:

1. A (short-lived) market correction is a market correction: In investing, according to Investopedia, a correction is a decline of 10 percent or more in the price of a security from its most recent peak. An asset, index, or market may fall into a correction either briefly or for sustained periods — days, weeks, months, or even longer. However, the average market correction is short-lived and lasts anywhere between three and four months. The 2020 correction lasted three months (Jan, Feb, and Mar).

2. Ask again but differently: “How did AQM achieve only a 5.6 percent drawdown in 2020?” would have been a more insightful question. It is not the duration of the correction but how AQM was able to navigate past – and future – corrections that matters.

Answer: Multi-strategy diversification is the key to AQM’s resilience and approach to defending against corrections.

3. Benchmark to others: In 2020, amongst 12 peer funds (that I track), AQM’s 30.30% ranked second in annual return (behind Fund X with 33.90%) and second with a return-to-risk ratio of 1.67 (behind Fund Z with 1.93).

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Conclusion

I am grateful for my listener’s feedback and it is on me to craft a thoughtful initial response.

When one observes that the conditions that trigger a market correction are never quite the same and are unlikely to be repeated, the enormous task before a Portfolio Manager is to navigate market corrections of all shape, size, and duration.

In hindsight, I’d point out that when a fund successfully navigates a correction, consider giving it the appropriate level of credit where credit is due and be curious as to the how and why.

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The title of this post is a riff on Shakespeare: A rose by any other name would smell as sweet.

Email hello @ alphalyticscm dot com for more about our investment strategies: (i) High performance targeting 25% CAGR and (ii) All Weather targeting better performance than equities with similar stability as bonds.