Myth 1
Jonathan Jackson: Today, we're unpacking a few myths in Defensive Quantitative Investment Strategies. Vincent, let's start with one I hear quite a bit. The one size fits all approach works.
Vincent Samat: Well, most investors do want to minimize risk and preserve capital during a market downturn. However, the speed and the magnitude of the move during a downturn can vary quite a lot.
Jonathan Jackson: So defensive strategies are designed with specific market conditions in mind?
Vincent Samat: Exactly. And when you're using QIS for a hedging program. It's just as important to think about how it's going to perform during the bull market, during normal market conditions, as well as to assess how it's going to perform during a market downturn.
Myth 2
Jonathan Jackson: Let's move on to the next myth. That all defensive strategies deliver the same results. Is that really the case?
Vincent Samat: First, there is a very wide range of QIS families for hedging purposes. Second, even within the same family, you can have several variations that lead to very different outcomes.
Jonathan Jackson: Why is that the case?
Vincent Samat: If I look at the examples of different variations within the same family. The construction method can differ quite a bit. For example, a signal can be different or a trigger linked to a specific event can be different. During April 2025, I can think of two different strategies in the marketplace that have the exact same name, but that delivered a very different outcome for the investor.
Jonathan Jackson: So investors need to work with their investment partners to really understand what exactly is in the strategy, what's driving it, and which market conditions it might thrive and when it may not.
Vincent Samat: Exactly.
Myth 3
Jonathan Jackson: That brings us to our third myth that defensive, quantitative investment strategies are all about maximizing returns during market drawdowns and minimizing carrier costs during good times.
Vincent Samat: There is no Holy Grail. QIS defensive strategies are about managing trade offs. For example, if you're constantly buying put options, you will have good protection during market downturns. However, it is known to be prohibitively expensive.
Jonathan Jackson: What could be some cost efficient ways of managing that?
Vincent Samat: Let me give you three examples. First, QIS defensive strategies built around dynamic allocation. The strategy will have low amount of protection during normal market conditions. As the risk event unfolds, the strategy will buy more and more protection.
Jonathan Jackson: So with dynamic strategies, the risk is timing. The signal may not switch on in time or the positions may take time to build.
Vincent Samat: A second example are QIS defensive strategies built around proxy hedges.
Jonathan Jackson: And here the risk is correlations between different asset classes. Those correlations may change over time.
Vincent Samat: A third example are QIS defensive strategies that are built using a financing component. The financing component is used to generate income but will partially offset the cost of protection.
Jonathan Jackson: And in that example, the risk is the financing leg doesn't behave as expected. And what about looking at historical market moves?
Vincent Samat: It is natural to look at what happened during previous crises. However, that has pitfalls because a future crisis might unfold in a way that is quite different from the previous crisis. An alternative approach is to consider scenarios that are customized to the type of risk that you're trying to hedge.
Jonathan Jackson: Investors needs and scenarios will differ.
Vincent Samat: Focusing on their objectives and the various scenarios that they are trying to hedge for and partnering with their investment bank will help them design the plan that they need.
