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Crisis Alpha - The Holy Grail

Updated: Sep 2, 2020

The holy grail of trading is to generate out-performance during periods of market crisis. There are entire strategies focused on 'tail-risk hedging' to generate positive returns during market corrections and bear markets. The issue with tail risk hedging strategies is that investors pay a negative carry for these strategies (i.e. paying for insurance). In the aftermath of the 2008 financial crisis, these strategies came into vogue, primarily popularized by Nassim Taleb's black swan theory and hedge fund Universa Investments. However, for more than a decade following the financial crisis, these strategies performed poorly and experienced negative returns, while the equity markets roared from 2009-2019.


So how can you create crisis alpha without paying negative carry? Intraday momentum strategies have the ability to perform in violent down markets and strong market rallies. As the old market adage goes, 'the market takes the elevator down and the escalator up'. Bear markets tend to be very violent and experience strong negative intraday momentum. Intraday momentum strategies utilize signals to determine short-term trends in the market and bet on these continued trends throughout the day. While these strategies tend to perform best in bear markets, they can also benefit in strong bull markets where intraday trends persist as well.


Algorithmic Futures develops a variety of intraday momentum strategies to balance out the portfolio with crisis alpha strategies. Most recently, these strategies performed well during the COVID-19 pandemic, both as the market dropped precipitously in March 2020 and subsequently rallied back in April 2020. Although these strategies don't trade much during quiet markets, they serve their purpose during periods of market crisis and are an important constituent of an overall diversified portfolio of trades.



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