OI25: What If Lower Volatility Is the Wrong Goal ft. Suhaimi Zainul-Abidin

Suhaimi Zainul-Abidin · Quantedge Capital

Insurance-linked securities can earn around 20% on cash in some years, with returns varying by capital flows and losses.

ILS returns vary year to year and depend on the amount of capital flowing into the market, risk aversion, and whether a recent catastrophe event pulled capital out. Quantedge expects that in some years, and over the long term, ILS could produce roughly 20% returns on cash, which he describes as pretty healthy. The cited Swiss Re cat bond index performance is before costs.

“we would expect in in some years and and in fact, over the long term that you could get potentially 20% returns on cash, which is pretty healthy, pretty juicy.”at 13:01

Suhaimi Zainul-Abidin · Quantedge Capital

After large catastrophe losses, ILS capital exits and premiums rise sharply, creating better entry opportunities.

In the ILS market, when a bad event causes a sizable loss, risk-taking capital drains out the following year. That reduced supply pushes premiums up a lot, so the market is most attractive to enter right after losses. Quantedge wants to be positioned for that moment.

“whenever something bad sort of materializes and and all the risk takers take a hit because there's a sizable loss, you will see that capital drains out of the market the following year. But as a result of that, actually, premiums go up a lot.”at 14:24

Suhaimi Zainul-Abidin · Quantedge Capital

Cross-asset correlations occasionally spike, with rare years where everything falls together, so tail risk must be managed.

Strategies that are naturally uncorrelated, such as interest rate decisions and wildfire risk, usually have no link. But in rare years everything can go down together, so correlations can converge. The portfolio must stay alert to these tail events even though they are unlikely.

“from time to time, rare as it may be, there will be years when, you know, everything sort of goes down together.”at 15:48

Suhaimi Zainul-Abidin · Quantedge Capital

Equity indices across countries are highly correlated, so holding many equity markets is not real diversification.

When people say they hold a diversified book but only trade one market, that is hardly diversification. Even across markets, there is a lot of positive correlation between equity markets. Diversification only becomes meaningful when non-equity assets such as commodities are added, which behave very differently from equities.

“In fact, even across markets, there's actually quite a lot of positive correlation between equity markets.”at 17:00

Suhaimi Zainul-Abidin · Quantedge Capital

Commodities are a huge diversifying asset class for Quantedge's book, given their low correlation to equities.

Quantedge trades 40 to 50 commodities alongside about 300 markets. Equity markets are positively correlated with each other even across countries, but adding commodities diversifies strongly because energy and agriculture/grains behave very differently. Commodities are therefore a major diversifying asset class for the fund.

“So commodities is a huge diversifying sort of asset class for us.”at 17:16