Tail protection for long investors: convexity at work
We relate the performance of trend following strategy to the difference between a long-term and a short-term variance. We show that this result is rather general, and holds for various definitions of the trend. We use this result to explain the positive convexity property of CTA performance and show that it is a much stronger effect than initially thought. This result also enable us to highlight interesting connections with Risk Parity portfolio.
Finally, we propose a new portfolio of options that gives us a pure exposure to the variance of the underlying, shedding some light on the link between trend and volatility, and also helping us understanding the exact role of hedging.