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If you’ve been in markets for long enough, you may remember the February 2018 “Volpocalypse” episode that turned successful long-running trades on their head.
Traders who were betting against major market movements saw their profits erode in days, and a group of about 10 from Lausanne, Switzerland, were able to spare themselves of the horror.
“As much as many thought it was luck, it was not,” Guillaume Bourquenoud tells Benzinga.
The Alquant co-founder and CEO, who began trading near the tail-end of the European debt crisis under a famous investor, said he was able to extract high returns by betting against big market movements while leaning on his firm’s proprietary indicator which analyzes traders’ supply and demands of stock market protection, colloquially referred to as volatility.
“Just days before the sharp fall in stocks, our algorithms told us to stop selling volatility and go full cash,” Bourquenoud recalled. “We found it quite strange because this had never happened before. All of our tests confirmed the readings were correct, and we closed our positions.”
When many popularized short volatility products including Credit Suisse Group AG’s CS XIV fell upwards of 90% or more, Bourquenoud says his team’s methods were validated. In the weeks after “Volpocalypse,” Bourquenoud incorporated the award-winning idea as Alquant, short for Alternative Quantitative, and used recent wins as a platform to sell research and actionable market data.
“It’s actionable data not to be construed as investment advice or recommendations. It’s like the Cboe Global Markets Inc.’s CBOE VIX index but with some predictive power.”
Fighting The Recency Bias
Despite the successful track record, Alquant was unable to go to market.
Many investors Bourquenoud spoke with felt burned by the recent crash; the risks of similar trades were not worth the reward. The Alquant team created new products that enabled its users to better risk-manage equity holdings, rather than entirely speculate on volatility itself.
“We looked at implied correlations, too, and added a long volatility component because nobody wanted to sell volatility anymore,” Bourquenoud says. “Investors wanted to trim their downside and that is something we could finally do, though we avoided making too many changes because it can be hard for users to keep track of the methodology.”
The indicators validated themselves again in 2018 and 2020 when Alquant alerted investors to emerging risks up to a month before markets turned.
“Yes, you may have lost out on a tiny bit of upside, but you were able to not participate in the downside,” Bourquenoud elaborated. “I believe it was the March 23 re-entry, after the market had successfully bottomed in 2020, and the December 2018 episode, that showed our value.”
Graphic: Alquant’s solutions include the Vega Indicator which anticipates changes in the expected fluctuations of the stock market by quantifying the evolution of market participants’ emotional and cognitive biases.
After this next series of wins protecting users’ portfolios, Alquant raised funds, as well as built actively managed investment products for Swiss-based investors and Prisma, an interactive web-based dashboard to better track and assess the riskiness of participating in markets.
Since one year ago, Alquant’s Prisma has outperformed the S&P 500 by 6% on average while the firm’s long-standing Vega indicator outperformed by upwards of 15%.
Graphic: Alquant’s 2022 yearly review.
Expanding To The States
For now, Alquant is limited to working mostly with asset managers, family offices, pension funds, banks, insurance companies and private investors in Switzerland. Though the firm aspires to grow internationally, challenges include marketing during a highly-anticipated and orderly sell-off and regulation.
“It’s been challenging but we’re preparing for our next set of big movements as a company to enter into other regions of the world,” Bourquenoud says. Benzinga was told that investors outside of Switzerland are more interested in risk-taking; Alquant would likely do well as a complement to investors’ existing analyses in the U.S.
Until Alquant makes a big move out of Switzerland, Bourquenoud maintained it is important for the company to take special care of existing users so that it may be able to offer new solutions like consulting, when authorities permit it.
“To provide consulting or portfolio-specific recommendation is not in our best interest right now, and this is not something we engage in,” Bourquenoud said. “We do, however, go far to explain how to best use our research services and actionable data to reduce drawdowns, which we expect to affect traditional portfolio constructions like 60/40, particularly, in uncertain environments as we have right now.”
Photo: Courtesy Alquant
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Image and article originally from www.benzinga.com. Read the original article here.