Top Traders Unplugged

SI333: Convexity - The Trend Following Game Changer! ft. Richard Brennan

39 snips
Feb 1, 2025
Explore the transformative concept of convexity and how it changes the trend-following game. Learn why traditional risk assessment methods fall short and how embracing volatility can enhance portfolio returns. Discover the nuances of market sentiment through the lens of recent financial developments, like NVIDIA's valuation shifts. The conversation also highlights effective risk mitigation strategies, urging investors to rethink their approaches to risk and volatility in an unpredictable economic landscape.
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INSIGHT

Convexity in Trend Following

  • Convexity in trend following explains the non-linear relationship between market movements and portfolio returns.
  • It allows for accelerated gains in favorable conditions while mitigating losses through effective risk management.
ANECDOTE

The Racetrack Analogy

  • Richard Brennan uses a racetrack analogy to explain convexity.
  • Brakes allow for faster speeds on straights and controlled turns, similar to how risk management allows exploiting market opportunities.
INSIGHT

Flaws of Sharpe World

  • Traditional risk models, or "Sharpe world," rely on flawed assumptions like quantifiable risk, linear markets, and persistent correlations.
  • These assumptions fail because markets are non-linear and unpredictable, leading to unforeseen crises.
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