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Volatility Exposure of CTA Programs and Other Hedge Fund Strategies

Marc H Malek and Sergei Dobrovolsky
The Journal of Alternative Investments Spring 2009, 11 (4) 68-89; DOI: https://doi.org/10.3905/JAI.2009.11.4.068
Marc H Malek
is a managing partner at Conquest Capital Group in New York, NY.
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  • For correspondence: mhmalek@conquestcg.com
Sergei Dobrovolsky
is an independent consultant in Moscow, Russia, formerly head of the quantitative group at Conquest Capital Group.
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  • For correspondence: sdobrovolsky@hotmail.com
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Abstract

This article examines the dependence of trend-following CTA performance on underlying market volatility, both quantitatively and conceptually. While it is generally believed that CTAs have a long volatility exposure, tests conducted by the authors indicate that it is not quite true. The perception that CTA strategies are long volatility came from academic research and became widespread among traders. The notion of volatility exposure is sometimes confused with a dependence on volatility levels. If a CTA makes money in periods of high volatility and loses in periods of low volatility, its performance depends on the level of volatility. Volatility exposure, on the other hand, means that the CTA makes money when volatility rises and loses money when volatility falls. Both effects have comparable strength, are directly related, and thus are quite easy to confuse. By the same token, they need to be studied together, as is done in this article. The authors note that volatility exposure—i.e., dependence on volatility changes—should not be confused with dependence on volatility levels.

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The Journal of Alternative Investments
Vol. 11, Issue 4
Spring 2009
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Volatility Exposure of CTA Programs and Other Hedge Fund Strategies
Marc H Malek, Sergei Dobrovolsky
The Journal of Alternative Investments Mar 2009, 11 (4) 68-89; DOI: 10.3905/JAI.2009.11.4.068

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Volatility Exposure of CTA Programs and Other Hedge Fund Strategies
Marc H Malek, Sergei Dobrovolsky
The Journal of Alternative Investments Mar 2009, 11 (4) 68-89; DOI: 10.3905/JAI.2009.11.4.068
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  • Article
    • Abstract
    • VOLATILITY EXPOSURE AS A GENERAL CONCEPT
    • VOLATILITY EXPOSURE: OPTION STRATEGIES REVISITED
    • AVERAGE LONG-TERM VOLATILITY
    • VOLATILITY LEVEL DEPENDENCE VS. VOLATILITY EXPOSURE
    • EXPOSURES OF OTHER HEDGE FUND STRATEGIES
    • HEDGING IMPLICATIONS: “LONG VOLATILITY” OR “LONG VOLATILITIES”?
    • VOLATILITY DEFINITIONS VS. PRICE BEHAVIOR
    • MARKET TESTING
    • CONCLUSIONS
    • Disclaimer
    • ENDNOTES
    • REFERENCES
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