Registered: Mar 2003
02-25-11 07:19 PM
Quote from OddTrader:
The trading system in this thread, due to its small returns as I think, would not be interested by most retail traders who are alpha hunters aggressively seeking excess returns (type A above).
Instead, this thread trading ES against S&P 500 Index (as benchmark) is for a type B system very much about managing beta risk by providing (similar to what many CTAs doing):
1. not only negative correlation during S&P 500 market either declining or crash,
2. but also positive correlation during S&P 500 market moving upwards either slowly/steadily or dramatically/progressively.
Perhaps due to these unique characteristics, Schwager in his book Managing Trading (written solely about CTAs/Managed-Futures trading) mentioned/ discussed nearly nothing about either beta or alpha (surely these conventional measures would be applicable to CTAs in certain ways).
Should be good and useful for hedging systemic risk.
In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system. It can be defined as "financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries". It refers to the risks imposed by interlinkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market. It is also sometimes erroneously referred to as "systematic risk".
1. General: Probability of loss or failure common to all members of a class or group or to an entire system. Erroneously also called systematic risk.
2. Investing and trading: Probability of loss common to all businesses and investment opportunities, and inherent in all dealings in a market. Also called market risk, it cannot be circumvented or eliminated by portfolio diversification but may be reduced by hedging. In stock markets, systemic risk is measured by beta-coefficient.