i’ve been thinking for a couple of years about how the recurring V-shaped crashes and recoveries in large-cap indices have conditioned market participants to hedge for that and position for that. people prepare for the things that they expect to happen, right?

do-what-works, follow the trends; cut your losses, buy the dip, trade the range, sell the vol, hedge the tails, buy-and hold, etc become mantras that go in and out of style at different times in different markets. likewise with the trade-offs between costs and complexity.

if you assume herding behavior and risk- or fragility-concentration/accumulation over time (I do, but you don’t have to) then the logical conclusion is do what works but prepare for a possible regime-change, where “what works” can be something very different to what it is today.

most people, and i have been guilty of this in the past, sometimes incorrectly extrapolate “what works” to the overall macro context (as it applies to trading) instead of localizing it to certain clusters of asset class and factor intercepts, which is where they suffer setbacks.

“theres always a bull-market somewhere” is a common market saying. well, theres always a brutal prolonged bear market somewhere, and a crash, and a trend, and a stable range etc etc. there is no secular trends, though, just ones that are longer than our sample period.

so, in an instrument population where sample X has had a reliable pattern.. you need to prepare for that pattern changing. what if you buy tail hedges (long uncapped vs short capped varswap or long varswap v short volswap) and the next decline is a slow-moving one? hedge dont pay

what if value factor isnt broken or size factor isnt broken and the real issue is that after years and years of working they built up the kind of stresses that lead to the price behavior that participants did not expect?

look at VIX roll harvest.. killing it until 2018 kills the front month.. people move back in thr curve... 2020 kills that. tech was a bunch of dogs 2009-2013 then 2014 it started working and in 2020 its killing it. prices dont mean-revert and returns dont either, but sharpes do.

anyways... you can keep your strategy if you can change your asset class and security selection process if you identify regime changes, or you can keep your asset class and security selection if you can change your strategy in reaponse to regime changes. know what camp you are in

i guess you could try to be “all-weather” and identify regimes and which strategies work for which asset classes and which security selection processes whithin, plenty of shops have tried that but i am unaware of any that have durably succeeded (lol rentec is not in this group)