Strategy Risk

Strategy Risk implies changes in the employed trading strategies, which, in turn, leads to increased risks of other categories, for example, market or credit. Strategy risk refers to the style drift, which reflects change in the driving market factors. Typically, the style drift is expressed by a chart, which plots the factor weights over a given period, i.e., rolling factors’ breakdown. By itself, the style drift is not necessarily a negative sign. The risks derived from style fluctuations involve the two following issues. First, the unexpected style drift may signal either staff changes or a weak trading strategy itself. Second, the style drift may lead to an excessive exposure to the market factors, which involve an increasing amount of credit or market risks. While the style drift can be easily quantified, it seems hardly possible to define the rules for the “good” and “bad” style drifts. Each fund needs an individual assessment taking into account not only the economic factor composition, but also their diverse impacts under the current market conditions.


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