Many experienced investors swear by the “buy-and-hold” strategy. However, it has its disadvantages: big market slumps shrink investment values as well. You don’t need to worry about this if you have enough time to wait for the market to recover. But what if you don’t? The advance in computer technologies allowed creation of completely different strategies – strategies that can generate interesting returns even during market reversals. And that’s what we – in our hedge fund QuantOn Solutions – focus on.
Each investment strategy carries some risks. Moreover, every strategy is different.
There is a wide range of risk-management techniques available in the financial field.
Today, I am going to introduce you two basic approaches:
1) convergent risk-management strategy
2) divergent risk-management strategy
while I’ll point out to differences between these two different investment styles.
The first one is a classic buy-and-hold approach: You buy and hold stocks according to some key.
The second one is called the trend-following approach within which you divide your capital into several approximately equal parts and then spread it among a large basket of markets, mainly by the usage of technical analysis. You speculate both on growth (long positions), as well as decline (short positions). Your primary objective is to profit significantly on long-term trends, which, however, also means that you’ll have to endure many losses caused by false entry signals generated by your strategy.
A person who chooses the first strategy gets exposed to the convergent risk. They are likely to believe that there are stable and predictable market conditions.
Investors who employ trend-following strategies are exposed to the divergent risk. They see the market as a constantly changing cycle of unknown, volatile, and mostly unpredictable events.
The article continues right there: 2/3 Which Alternatives Do We Have to Long-term Equity Investments?
Petr Tmej
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