Regulators' Unintentional Effects on Markets

This article written by Kathryn M. Kaminski, PH.D, was originally published in the July 2011 issue of SFO Magazine.

• Kathryn M. Kaminski is a senior investment analyst at RPM Risk & Portfolio Management.

Systematic, diversified trend following is one of the most popular investment strategies in futures markets.

It is also one of the few strategies that has been able to capture crisis alpha. Crisis alpha is defined as profit opportunities that are gained by exploiting the persistent trends that occur across markets during financial crisis.

When equity markets are in crisis, the vast majority of market participants are long biased to equities. As investors realize losses, many of them act on their emotions. When this is coupled with the widespread use of institutionalized drawdown, leverage and risk limits — which are triggered by losses, increased volatility and correlation — equity losses will force large groups of market participants into action.

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