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misosoup


Total Posts: 3
Joined: Mar 2018
 
Posted: 2018-03-17 10:44
In the space of robustly tested, profitable strategies, is it approximately right to think that the less popular a type of trading strategy is with investors due to reasons such as max DD or Sharpe, the more likely profit is to be found there by someone with a tolerance for higher max DD or Sharpe?

Or are these less desirable strategies somehow combined into portfolios which allows investors to benefit from them without the undesirable properties?

More broadly are there, at any given time, strategies which work but are not utilised due to other undesirable properties?

ThomasJ02


Total Posts: 37
Joined: Feb 2009
 
Posted: 2018-03-19 00:15
Certainly. There are lots of strategies that work due to heterogeneous investor preferences / constraints.

Consider as a simple example the fact that high-beta stocks underperform (http://pages.stern.nyu.edu/~lpederse/papers/BettingAgainstBeta.pdf). The theory is that managers who can't access leverage instead purchase high-beta stocks.

Or consider the illiquidity premium. People with shorter investing horizons naturally value liquidity in their investments. (Note that this is not necessarily irrational: If I anticipate an expense at a particular date and cannot borrow cheaply against my investments, it makes sense to pay a premium for the liquidity that I will need).



misosoup


Total Posts: 3
Joined: Mar 2018
 
Posted: 2018-03-19 19:21
Thanks Thomas.

Given that we had some leading indicators of investor demand for classes of strategy, am I right to think that you could literally trade "demand" as a primary factor? I.e. that the performance of any given strategy will be driven to a large extent by the demand for the strategy, so you could go long/short the strategy in order to profit from change in demand almost independently of the underlying trades.
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