Focus on the downside
For its risk management TRANSTREND focuses on the downside
potential in extreme events. It recognizes that in extreme events,
trading will not be possible at all or will be prohibitively
costly, so extreme risk can be controlled only by anticipation, not
by response. An effective way of anticipating on extreme events is
diversifying carefully and avoiding large, concentrated positions.
In the Diversified Trend Program, position sizes are determined
with the constraint that the estimated aggregate impact of an
extreme event - the loss due to a major adverse price movement in a
particular market, together with all losses due to the
corresponding adverse movements in all other markets - does not
exceed a predetermined boundary. |
Correlation analysis
TRANSTREND's advanced correlation analysis plays a central role in
estimating the aggregate impact of an extreme event. This makes no
fundamental segmentation in market clusters, because correlations
typically exceed cluster boundaries. It acknowledges that
correlations can change over time, which compels an adaptive
correlation measurement. And finally, it understands that
correlations cannot be represented meaningfully by a single number.
The correlation structure is generally not symmetric and is
non-linear because of threshold effects: i.e. markets not
correlated under normal circumstances can be correlated under
extreme circumstances.
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