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How to Create Alpha While Minimizing Volatility

Sarah Sands

Jared Dillian's Key Insights on Recent Market Trends

(Continued from Prior Part)

Using opposite trades to create alpha

The outcome of any investment decision is purely based on how economic variables interact with each other over the course of time. However, the variables could interact differently from how analysts expect them to. This generates the downside risk of investments. However, the risk can be minimized by entering into two trades that could perform oppositely to each other. Here’s where intellectual flexibility rather than intellectual rigidity is key. The addition of more securities actually generates excess returns by minimizing risk.

What does Jared Dillian say about alpha?

Jared Dillian of Mauldin Economics speaks about his portfolio management strategies, in which he is focusing on generating alpha by minimizing volatility. His strategies include the following:

  • shorting the commodity-producing countries
  • taking a long position on emerging economies (EEM) (VWO) (EDC), gold (GLD), and commodities (DBC)

He says that shorting commodity-producing countries such as Canada, Brazil, Australia, and Norway could work out, as commodity prices could rise. However, commodity-producing countries may underperform because of country-specific problems. Canada (EWC) could witness a housing bubble, which would impact its overall outlook. Brazil (EWZ), along with high inflation and high unemployment, is witnessing political and economic turmoil. Thus, Dillian is making money by opening two opposite trades. Intellectual flexibility is a quality that plays a major role in this scenario. By applying this strategy, he is generating alpha while minimizing volatility.

Read our series titled Quantitative Analysis of Latin America’s Bull Run: Is It Overdone? for more on this topic.

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