Positive Convexity: How Quest Partners Has Outperformed The Index By +7.5% Annually
Positive Convexity: How A CTA Has Outperformed The Index By +7.5% Annually by Opalesque.TV
Nigol Koulajian is the Founder and Chief Investment Officer of Quest Partners LLC, a CTA he established in New York in 2001 which currently manages approximately $630 million in assets under management. The AlphaQuest Original program (AQO) is the firm’s flagship strategy. AQO has delivered an annualized return of +13.5% over its 16 year track record, with +7.5% of annual alpha over the BTOP50 Index and +11.5% of annual alpha over the S&P 500. AQO also performed well in recent years, returning +16% in 2013 despite a low volatility environment and up +24% in the high volatility environment of the first two months of 2016 while the S&P was down -5% and CTAs up just +5%.
In this Opalesque.TV interview Mr. Koulajian describes his investment philosophy, which relies on a strict discipline to identify opportunities with positive convexity. This discipline is contrary to the vast majority of hedge funds and CTAs who typically run negatively convex strategies, an approach with higher inherent risks. While negatively convex strategies can offer higher corresponding alpha and Sharpe Ratio, that type of alpha is also cyclical and can lead to crowded trades which accelerate faster when markets go down. Unfortunately, and to the detriment of most investors, about 90% of hedge funds in the market today are negatively convex, meaning that almost every hedge fund strategy aside from short sellers tends to make money slowly and lose it very fast.
Quest Partners – Seven major style drifts in CTAs and why CTA Indices underperformed CTA replicators by 60%
Mr. Koulajian’s discipline and focus on positive convexity has driven the outperformance of each of Quest’s four distinctive strategies, which have all generated alpha to their benchmarks. He also discusses the seven major style drifts which are hindering performance in large CTA strategies. These style drifts have negative convexity and therefore result in negative return streams during equity corrections, which explains why CTA Indices underperformed CTA replicators by approximately 60% from 2007-2009.
Nigol Koulajian is the Founder and Chief Investment Officer of Quest Partners LLC. He has been designing and trading short-term and long-term technical systems for over 25 years. Mr. Koulajian began his career with Andersen Consulting and then moved to Deutsche Bank, where he helped create and computerize a risk management system that became a widely used tool for senior management. He then became the Head Trader for Carmel Capital and while working at Carmel, designed and priced hedges on international equity and fixed income arbitrage positions. In 1996, Mr. Koulajian joined Weston Capital Management, where he was the Director of Asset Allocation and Product Development, responsible for the allocation of assets to equity hedge funds and CTAs. In 1998, Mr. Koulajian started Avalon Asset Management, a fund of funds, and in 1999 he co-founded a CTA, Enterprise Asset Management. Mr. Koulajian earned an MBA in finance from Columbia Business School and a BS in electrical engineering from Notre Dame.