Style Drift
In doing some research I came across the following excerpt. The date of the article has no relevance for my point:
“A key failing of equity managers in 2003 had been their inability to capture the upside when markets bounced. That had happened largely because managers were still licking their wounds from 2002 and an environment that had penalised risk-taking. But managers were not being paid to hold cash; they were paid to put it to work. Getting the risk profile right meant investors understanding how drawdowns happened and being able to distinguish between “good” and “bad” drawdowns. “Style drift is a bad drawdown…Breaching limits is a bad drawdown. But an investment decision that was part of the strategy and went wrong is not a bad drawdown. You need to take on more risk without scaring the hell out of investors.”
The whole concept of style drift is very important. Put simply it means jumping from one trading strategy to the other. Kind of like chasing your tail (if you happened to have a tail).
A good drawdown is one that happens because you expect it. A good trading strategy will have drawdowns from time to time. You can’t avoid them. They are not unexpected. A bad drawdown, on the other hand, is one where the losses pile up as you chase the latest hot manager or hot investment tip. Bad drawdowns stem right from impatience and greed.
